Mortgage broker warns against locking in long term fixed interest rates
To fix or not to fix – that is the question
Aussie homeowners have been all been watching the housing market with increasing anxiety this year as experts expect mortgage rates to remain elevated amid ongoing economic uncertainty.
According to Julian Finch, founder and principal broker at Finch Financial Services, Australians need to be particularly smart about their mortgages over the next 12 to 24 months. He is urging Aussies to act with caution when it comes to fixed interest rates. Fixed rates are coming down.
“Inflation is typically tied to interest rates which is why the figures tend to move together. While inflation appears to be cooling and moving in the right direction, there is still scope for some market volatility. While everyone is hoping that rates continue to go down, the reality is that the world economy is in the midst of some fundamental shifts,” Finch said.
Finch is a highly respected thought leader in the lending sector who has operated through a number of recessions including the GFC and understands market trends and signals more than most.
“With interest rates rising as part of the fastest tightening cycle in decades and the recent pause suggesting the RBA is now responding to softer inflation figures, many clients have asked me to advise on whether they should opt for a fixed rate. The challenge is that there is no straight up answer to this question, and the answer greatly depends on each individual’s unique circumstances,” Finch said.
“So when clients ask my opinion and advice, I always insist on reviewing their situation thoroughly in order to give them the best information possible. There are five main things that we factor in when helping clients decide whether or not to fix their home rates.”
1. Ability to budget
“With a fixed rate, you have certainty with repayments during the fixed rate period you've selected. Having a fixed rate and strict repayment schedule makes it easier to budget. If you’re able to budget with accuracy and market indications suit a fixed rate, then I recommend exploring the options for a fixed rate,” Finch said.
“Having said this, fixing your rate doesn’t mean fixing the entire loan. Banks like fixed rates because it locks in their revenue. Fixed rates should provide you with relief and certainty when the market appears volatile. You can op to fix all or part of your loan. This approach gives you flexibility should your circumstances change.”
2. Protection against rate rises
“The second main advantage is that fixed rates offer you protection against unwelcome rate rises,” Finch said.
“The beauty of this is that it really allows you to plan for the future and set your financial goals with confidence. Different lenders provide different benefits, features and honeymoon periods to capture your business away from other competitors.
“These options need to be considered in the context of whether or not to fix your rates.”
3. Fixed rates expire
“One thing to keep in mind is that fixed interest rates expire after the initial agreed period. When it concludes, you will either have to revert to variable interest rates, or negotiate a new fixed rate with the bank, or move to another institution altogether,” Finch said.
“Fixed rate terms can vary. The length of the rate should always be considered in the context of what is happening in the market. Australia tends to be somewhat cocooned by what happens elsewhere in the world however we are increasingly part of one global economic community. What happens overseas is likely to impact us faster than ever before.”
4. Flexibility
“For those looking for flexibility, variable home rates are better suited to you. The interest rate a bank offers can be affected by a number of factors, including in part the official cash rate set by the Reserve Bank of Australia (RBA) as well as higher or lower funding costs for the lender,” Finch added.
“You could also potentially repay your home loan faster if there’s an interest rate fall and you can take advantage of this. Similarly though, if there is a rate hike, your repayments will go up. In this sense, it can be harder for you to budget.
“Facilities such as offset accounts which are often available for flexible rates, are a great way to take advantage of any savings and their ability to reduce loan repayments, even if only briefly. When you are dealing with hundreds of thousands of dollars, savings can be made through a simple restructure of your bank accounts.”
5. Negotiation and change are possible
“Remember that negotiation is often possible. Don’t think that you’re trapped. Home owners are actually able to change from fixed to variable rate or vice versa by speaking to their lender or broker. Just be aware that in some cases, an indemnity may be required after the negotiation so you will need to factor this in and make some calculations before making a change,” Finch advised.
“Lenders will always offer new customers great incentives to switch and treat existing customers poorly in comparison. Work your lender and ensure you are getting the best rate possible. This is essential, especially if your loan is flexible. You may be able to negotiate a flexible rate that is equal to fixed rates elsewhere.”
Deciding factors
“As well as market forces, your credit record and your deposit, the lender that provides the home loan will play a significant role in determining your interest rate. Whether it’s a variable or fixed interest rate you’re after, different lenders will offer different deals as all providers have different lending policies,” Finch said.
“I believe that no two individuals or businesses are alike, and cookie-cutter solutions just don’t work for my clients. That’s why I take the time to understand everyone’s specific goals, aspirations, and financial circumstances. Finding the right lending solution is not always an easy feat.
“To fix or not to fix is not an easy question to answer and requires more thought and understanding of circumstances.”
About Finch Financial Services
Based in Hurtsville, NSW, Finch Financial Services has been servicing Australian families and businesses with home, personal and commercial loans as well as asset finance services since 2015. Ranked amongst the top five percent of brokerages in Australia according to data from the MFAA, Finch Financial Services is a leading brokerage and family owned business that specialises in finding their customers loans that are tailored to their needs and goals.
https://finchfinancial.com.au/
