The offer of a fixed rate period on your mortgage can sound awfully tempting, especially if you’re in the camp of the nervous speculators, worried that a rate rise is on the cards in the near future.
But fixing your rate could be an ill-conceived move – and it may even cost you thousands more than you’d ever stand to save, if you don’t think it through carefully.
While there are some situations where there is a definite benefit to fixing, there are other times when it could cost you. Here are three scenarios in which fixing your rate could be a really bad move…
1. When you’re attempting to beat the banks at their own game.
I don’t doubt that you are a savvy investor – one that has done loads of research into the property market and has a good grasp of how finance works. But sadly, you’ll almost never beat the banks, no matter how clever or resourceful you are.
Just like trying to time the property market, attempting to get one up on the major lenders by fixing your rates is rarely a recipe for success.
Think about it: these massive institutions have entire teams of economists, speculators and political experts whose sole job is to monitor economic conditions and property market movement. Do you really think you can get the jump on them?
2. When your lifestyle is looking unstable.
It goes without saying that locking down any important decisions when your life is in upheaval is not a wise move, and this includes fixing your interest rate.
If you’ve purchased the property with a partner, and your relationship has deteriorated, don’t even dream of taking on a fixed-rate loan. If your job situation is looking precarious, the same applies.
If your loan is variable, you have more options: you could sell, or refinance. But just imagine the stress you’d be under if you were locked into a fixed-rate loan and lost your job, or were forced to continue living with a partner after things had gone sour because you couldn’t afford to get yourselves untangled from the mortgage…
Personal illness or injury, sick family members, pregnancy, starting a business – for all these situations, it’s can be best to hold off on fixing your interest rate, until life becomes a little more predictable.
3. When there’s any possibility you’ll need to sell.
The fees for breaking out of a fixed-rate mortgage can be enormous, and could seriously compromise your financial position. So, if there’s any chance at all that you may want or need to sell the property, absolutely DO NOT fix your interest rate – instead, hang onto the most flexible product your lender has to offer.
There are many reasons you might need to offload the property in a hurry: elderly parents interstate might need some help, or you’ve been transferred overseas for work. Not to mention the obvious reason for needing to sell quickly… financial problems.
If you’re already in the red and are hoping that selling your home will get you back on track, being hit with a hefty breakout fee will only add to your woes. The same logic applies if you may need to refinance down the track – getting out of your current loan may cost you more than any savings you stand to make through refinancing.
Fixing your rate can also have a negative effect on your borrowing power.
Moral of the story? Unless you’re 100% solid on your plans to keep a property asset for the fixed period, don’t lock in a fixed-rate loan option. It could cost you dearly.