If rates rise, should I move to a fixed rate mortgage?
From the moment you take out a mortgage, you'll take a much keener interest in Australian interest rates. Should you be on a variable rate mortgage or a fixed rate mortgage? Here we look at your home loan refinancing options as interest rates rise and fall.
When interest rates drop
If you took out a variable rate mortgage, you were effectively taking a view that interest rates in future would be steady or fall. So when the Reserve Bank announces a quarter or half point drop, you'll be feeling pretty clever. But how should you respond?
Live it up?
If your interest rate falls, you could simply lower your repayments and enjoy an improved lifestyle. That's very tempting but not necessarily the way to go.
Pay off more
It might be smarter to take advantage of the lower interest rate to pay off more of your loan. Remember, lenders tend to load the interest on the earlier years of a loan, so paying more now could significantly reduce your interest charges over the term of the loan – if rates remain low.
When interest rates rise
If you have a variable rate mortgage, an interest rate rise is not great news. However, as always, you have options.
Refinancing to a fixed rate mortgage
The instinctive response for most people when they hear rates have gone up is to switch from a variable rate to a fixed rate mortgage. That's understandable. Unfortunately, lenders in a climate of rising rates will make you pay for that interest rate certainty. Also, you don't have the flexibility of paying off your mortgage sooner with a fixed rate mortgage. There is another option.
Increasing your mortgage repayments
Mortgage refinancing is generally about one thing: reducing the overall cost of your home loan in the long term. If you're going to be paying a higher interest rate, one way to reduce the interest charge is to reduce the amount you owe by actually increasing your monthly repayments – if that's possible. For help with your mortgage refinancing, contact Bevon Sinnott by emailing [email protected]
An MFAA Approved Credit Adviser is not your average mortgage broker.