What you should consider before fixing your home loan

Locking in a mortgage interest rate comes with many restrictions so borrowers need to think carefully before fixing their loan. Sophie Elsworth reveals why she chose to do it.

To lock or not to lock in your home loan rate.

It’s something that crosses the mind of nearly every mortgage customer.

A few weeks ago I took the punt and chose to fix my rate.

And not just lock in a portion – I locked in the entire amount.

It’s a decision that can end up biting the borrower, me in this case, on the bum if rates happen to fall further.

My fixing this time was on a mortgage investment loan, quite different to locking in an owner occupier loan.

This is because investor rates are often more expensive than owner occupier loans and usually the rates don’t fall by as much when cuts are passed on.

Variable rates are in most cases a fair bit higher on investor loans and make repayments noticeably higher.

Regardless of the type of loan anyone has, it baffles me how people let rates slide, much to the glee of the banks.

I received snail mail, an email and text from my bank in the weeks prior to my three-year fixed rate expiring on the loan.

I could either take action or just leave it.

And if I sat idle I would end up being left on a much higher rate than I could otherwise get if I took action.

And I got lucky, very lucky.

Mortgage interest rates and at record lows and some are even less than three per cent.

When I told the bank about one week before the fixed rate period was due to expire to lock me in again, I was offered a two-year fixed deal at 3.39 per cent, which I thought was good.

But when I rang up my bank on the day the paperwork was being processed, I asked them the rates again and got some good news.

Just a few days prior, investor fixed rate loans with my lender fell further, so I decided to lock in for three years – at just 3.09 per cent.

I was pretty happy with that.

In my eyes, a rate this close to 3 per cent for an investor is as cheap as chips.

For now, it’s the best option and far better than being left on a variable rate above 4 per cent, which was the alternative I was offered.

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Interest rates in 2020 will undoubtedly continue to move – almost certainly downwards – so for those looking to save it could well be worth leaving your loan variable.

However, as I explained, this might not be the case for investors.

Also, not to forget, fixing does restrict borrowers in many ways.

It limits how much extra could be paid off the loan each year, usually it doesn’t have an offset account or redraw facility, and hefty break costs apply if the borrower decides to exit the loan prematurely by selling or refinancing.

I might regret locking in my loan for three years. Time will tell, but any rates close to the 3 per cent mark right now are pretty darn good.

@sophieelsworth

Originally published as What you should consider before fixing your home loan