Getting the right amount of your mortgage fixed will determine how flexible the terms of your repayment will be. Deciding how much to fix has a lot to do with;
- Any expected lump sums you might want to pay off in the coming years
- Your new budget in terms of income and outgoings with the new rates
- Any plans for changing your home; trading up or down in the coming years
Fixing your home loan gives you the comfort of knowing exactly how much you will be paying. It does also limit what you can do with the loan during the fixed period.
Fixing the right amount
Fixing – the good saver
Bill and Sue are buying their first home. They have a $400,000 mortgage, can save an additional $5,000 every year and currently have $10,000 in savings. I would suggest the following structure for the couple:
- $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 Bill and Sue want to fix for a year or less. If they decide to fix for 4 years then they would need to leave aside another $15,000 as a flexible redraw home loan, to enable them 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
Fixing when paying a big chunk
Fareena and Rajesh have a $300,000 mortgage and are trying to sell a property in another country which should free up a lump sum of $50,000 within the next 6 months. Apart from that, their budget is tight, so they are unlikely to have any other savings available to put in the bank as a lump sum. So based on the above it would probably be wise to fix only $250,000, leaving $50,000 on a flexible redraw facility to enable them to reduce this portion as soon as possible, while maintaining the ability to take the money back out of the mortgage if required.
How long should I fix my rate for?
The above example gives you an 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; giving 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 that you require this stability. If you may be selling your home in the next three years then fixing longer than this term could mean you have to pay break costs.
If there are no limiting factors to the minimum or maximum term then you could try picking a number out of 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 intend to have a mortgage for the next 20 years, then fixing for 5 years will give you 4 chances of being wrong or right, while fixing for 2 years will give you 10 chances.
Split your fixed terms
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 option is if there is always something fixed at the bank then it may be harder to move when your negotiations for a fixed rate does not work out with your existing lender.
We provide a fixing service for free with most major banks, so call us to discuss your next move.