Andrew Mirams from Intuitive Finance answers the often asked question – to lock in or not?
Transcript:
Kevin:  This question comes in from many, many, people – no one specifically, but we are regularly asked this question and more so right now with the movement in rates. The question is “Is this a time to fix my interest rate?” Well, let’s find out. Joining me to discuss this is Andrew Mirams from Intuitive Finance.
Andrew, no doubt, you’re asked the same question.
Andrew:  Absolutely, Kevin. Very, very, very topical at the minute with rates high on the agenda and rates reducing lately, and now there’s a real frenzy towards fixed rates. And the frenzy is largely being led by the lenders coming out with some really great fixed-rate options.
Kevin:  They’re all out touting for the business. How do we make that decision when it is time?
Andrew:  There is a whole range of things. Rather than just focusing on the rate, there’s a whole range of things that you probably need to attend careful consideration that I think you need to just take into account before you go and rush in and just grab a rate. I think there are a number of things.
The first one with that is really deciding on the fixed rate term. Lenders are trying to lock you in for certain times because that’s where they are able to access cheap money. But does that actually suit what you are trying to achieve either from your home, your investments, or whatever it is. So actually deciding on the terms is a really important one.
The next couple that you need to be aware of is the majority of lenders won’t have an offset account with a fixed-rate mortgage. They very seldom allow you to make additional repayments. Most of them will allow you a small increment each year – maybe $5000 to $10,000 – but if you’re really looking to fast track repayment on your loan, you generally can’t do that with a fixed rate. You can’t have a redraw. Just like most lenders won’t have an offset account, you can’t redraw your additional payments, as well.
The fixed rates really do just give you a guaranteed rate. They reduce your flexibility and your options a hell of a lot more, as well.
Kevin:  What about additional payments? Is that an important consideration, as well?
Andrew:  I think for a homebuyer or someone trying to reduce their home loan or something like that, absolutely it can be. Everyone is different, Kevin. Some people can’t have cash sitting in their account; the temptation is too much. So actually reducing their loan and seeing it come off the loan is an easier way for them to be disciplined around their loan repayment.
Kevin:  Will all lenders allow you to split your loan – in other words, do part fixed and part variable?
Andrew:  Yes, and that’s a really good strategy we are finding at the moment with rates so low – being able to grab some rate security with a fixed rate but keeping a flexibility available with an offset, with additional repayments, with redraw, and things like that. I think, depending on the size of the portfolio, that’s probably the best strategy to be looking at and considering right as we speak.
Kevin:  Is there a better percentage to do it?
Andrew:  The majority of people say, “I just want to fix half.” If you’re really fixing because you’re worried about your rate security and rates potentially going up – which I don’t think will happen any time soon – you might put more into the fixed and keep more flexibility. If you had the opportunity to be paying more off over the short term, you might put more in the variable rate and less in the fixed rate. So it’s really just getting the balance right.
Kevin:  I suppose a couple of other considerations would be if we want to sell during the fixed-rate period and also if I’d like to refinance.
Andrew:  Absolutely. Once you’ve agreed with that rate and it’s for a two-, three-, four- or five-year term – whatever you’ve agreed to – that means that you’ve actually locked those funds in. So if you want to refinance within that term or you sell the property within that term, you can be up for some – at times – quite hefty repayment penalties.
Kevin:  We’re all a bunch of gamblers, mate. What about that feeling of “Wow, maybe rates will go lower”? Should that be a consideration?
Andrew:  No, it shouldn’t be. It’s like taking an insurance policy. When you take an insurance policy on your home, you’re hoping it doesn’t burn down so that you can claim on it. A fixed rate is a bit the same; you’re fixing it in for that period because you want that certainty and you think it’s a good rate. Don’t focus on what the rates might do because there is generally a longer term rationale and philosophy around the fixed rate.
Kevin:  I said at the outset that we get this question quite often. I do recall someone who wrote in and asked about this question and was wondering whether or not they could access extra equity if the property increased in value during the fixed-rate term.
Andrew:  That’s a great question. The short answer is yes, you can, but it has to be with that lender that you’ve fixed at. So you can’t take it to another lender unless you’re willing to pay the repayment costs. It’s not added on to that current loan. It would be set up as a separate loan or line of credit or whatever facility you wanted to take.
The short answer is yes, but then you’re subject only to that lender’s terms and conditions at the current day.
Kevin:  What about job security? I guess everyone should have a buffer anyway, but you should have a buffer if you’re not quite sure about how secure your job is.
Andrew:  Absolutely. If you’re thinking that you’re looking to change jobs, your position might change for better or worse, and that might give you the opportunity to make more payments or you’re going to struggle with the loans, then I would suggest fixing at that time is not the best option unless you’re guaranteed to have some ongoing income.
You’re right; you have to have your buffer there, but you want to make sure that you’re not fixing yourself in to give yourself less flexibility. All of the splitting and fixing and having a variable rate, you should always be looking at the maximum flexibility as well as then grabbing some rate security.
Kevin:  That’s a great insight, Andrew. Thank you so much for that. Just wrap it up for me, now give me a conclusion to this – your summing up.
Andrew:  I think before you rush out and fix rates or do anything, that you’re just grabbing an actual rate, just make sure there is a little bit more strategy around what your actual end goal is. Don’t grab a five-year rate when you might be going to sell the property in two years. You need to just put a little bit of thought process in before you actually lock in, because once you’re locked there is no unwinding it without some cost to yourself.
Kevin:  Great advice from Andrew Mirams at Intuitive Finance. Don’t forget you can discuss your specific needs and formulate the right strategy for your needs by getting in touch with the team at Intuitive Finance. Organize your complimentary 60-minute session today. Click on the link on the home page at RealEstateTalk.com.au.
Andrew, thanks for your time.
Andrew:  My pleasure, Kevin. Thank you.