Fixed loans are very popular items in the home loan world, coming in and out of trend every year as interest rates change. But with future fluctuations being so unpredictable, how do we decide when to lock in a fixed loan for one or more years?
We apply for fixed home loans to hedge against expected interest rate hikes in the future. But when we do this, we’re also making ourselves vulnerable to the risk of interest rates dropping, which will leave us in the lurch with higher repayments.
The decision will have a dramatic impact on the life of your home loan. For example, fixing during a down turn in rates can see you paying 200 or 300 basis points lower than others in following years, while locking yourself in during an upswing can leave you paying thousands of dollars more than your neighbours every year.
The lifestyle factor
But it’s not all about money for everyone. Many Australians believe that the ability to predict and manage your repayments in the long-term is worth missing out on a few interest rate drops. But even these ‘fixed loan fanatics’ will avoid fixing if the costs are too high.
Fixing for keeps
‘Locking in’ really means just that with fixed loans. When the decision is made, you won’t simply be able to switch back to variable rates at the first sign of a rate fall. Most fixed loan contracts contain astronomical fees for those who want to unfix, which usually counters any savings you would make from switching to a lower variable rate.
Knowledge is power
Predicting future rate trends is key to picking the perfect time to fix rates. To know when this is, stay in touch with commentary, news, and products in the market. But more importantly, continue to compare fixed and variable home loans online to see just how much you can save over the years.
After all this, fixed loans might even sound like a form of gambling. The risks can be high, the stakes are massive, and you can win big with a bit of luck. The only difference is you can improve your odds by comparing fixed loans against the competition today.