Mortgages

How long should I fix it for?

Picking the right amount and fixed term will determine how flexible the terms of your repayment will be over the coming months or years. You want to look closely at your budget and the rates available, you want to think about any future plans which may require you to pay of a lump sum of your mortgage. And you don't want to think too much about things you do not have any control over, such as all the different financial variables throughout the national and global economy that effect the interest rates. Mainly as the forecasts based on these types of variables can change at the drop of a hat.

Here are couple of examples of how you might decide how much not to fix

Bill and Sue have a $400,000 mortgage, they can save an additional $5,000 every year and have $10,000 in savings currently. Now based on the above I would suggest the following structure:

• $10k savings + $5k additional (for every year they want to fix) = $15k as a flexible or floating with a redraw loan
• $400k - $15k = $385k as a fixed loan

This would be ideal if the client would like to fix for a year or less. If the clients to decide to fix for 4 years then we would need to leave aside another $15,000 as a flexible redraw home loan, to enable client to reduce the balance their interest is charged on, by the additional $5k per annum they have spare in their budget.

• $10k savings + $20k ($5k in savings x 4 years) = $30k as a flexible loan or floating with a redraw facility.
• $400k - $30k = $370k as a fixed loan

Another Example

Fareena and Rajesh have a $300,000 as a mortgage and are trying to sell a property in another country which should make another $50,000 available in the next six months. No additional savings in the first few years. Now based on the above it would probably be wise to fix only $250,000 leaving $50,000 on a flexible redraw facility to enable clients to reduce this portion as soon as possible but still give them the ability to take it back out of the mortgage if required.

This gives you some idea of how much you should put aside for fixing but how long should you fix for? One of the main benefits of fixing a rate is that you will know how much the repayments will be for the fixed term; this gives you a sense of security. If there is some specific reason for needing this stability of repayments, such as starting a new business venture or having a baby, then you should try and fix for at least the amount of time you require this stability. If you may be changing home in the next three years then fixing longer than this term could mean break costs.

If there are no limiting factors to give you boundaries for the minimum or maximum term then you could try picking a number out a hat. Fixing for a shorter term may give you the ability to balance out gains and losses throughout your term. For example if you think you will have a mortgage for the next 20 years, then fixing for 5 years will give you 4 chances of being wrong and right, fixing for 2 years will give you 10 chances.

If you really can't decide, another option could be splitting your fixed home loan into two portions and taking half on short term and the rest on long term. This would hedge your bets a bit, the slight risk to this is if there is always something fixed at the bank then it may be harder to move when negotiation of a fixed rate does not work out with your existing lender.

To find out more about how to save money on your mortgage, call us or send us an email.

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