Fixed, Floating or Split Rate Loans? Here’s Some Food for Thought

Getting a home loan is a big commitment, and this of course involves choosing an interest rate that suits your needs. The following tips are a good starting point, but don’t forget I’m always here to help.

First: Don’t get fixated on the lowest rates – but paradoxically, I’m here to get you the best rate(s) and do the heavy lifting

No matter how low they are, the interest rates are only one component of a home loan. Your home loan structure, for example, should also get a fair share of your attention.

The main point with interest rates is beyond your control. What you can do is choose from a few options, based on what you can afford, how long you’re going to have the property, its purpose and your earning potential. There are other factors that may contribute to your decision too.

Rather than simply opting for the lowest interest rate you can find, it’s important to take a close look at how your mortgage should be structured for your needs.

… but if you do, don’t fix too long

If you’re opting for a fixed rate, for example, try not to fix for too long (five years or more). Some people recommend choosing a split between shorter or longer terms, or floating and fixed portions. As a matter of fact, unless you’re on an extremely tight budget, and there’s a solid chance of a rate rise, locking your home loan for a long period of time may prove costly in the long run. I’ve seen many people get caught out on high break costs because they believed fixing for a long period was the right move at the time.

And remember, if you decide to get out of a fixed rate contract before the term ends, your lender may charge a break fee to cover the early repayment. Also remember, when your loan was originally completed the bank may have given you some cash to help with legal fees and to attract your business; depending on the bank’s ‘cash clawback’ terms, you may need to pay them back some or all of the cash they gave you, and this may come as an unexpected surprise.

Please always discuss with me first so we can deal in facts and make decisions from there.

What about floating rates, then?

Depending on how interest rates are moving in the wider market change, floating mortgage rates rise and fall. Usually, if interest rates go up, so will your home loan repayments, and vice versa. The rate can go higher than fixed-term rates, putting a squeeze on your budget; but remember, the opposite is also true. Just remember, during the recession floating rates were falling like flies. My usual advice currently is fix for 1 year, however this is broad and based on my current belief that rates may have a little further to fall before they head up.

Another pro of choosing a floating rate is that you can make lump sum repayments, or increase your repayments, without any penalty. And with some types of loans, you can change to a fixed interest rate at any time. A revolving credit facility is also always on floating and may suit you. I like to refer to them as your “yo-yo facility”.

Split loans: probably the best of both worlds

As mentioned, there’s a ‘third way’: split loans. A split loan is where you have a portion of your mortgage on a floating rate, and a portion on a fixed rate. This provides greater flexibility and goes some way to balancing the effect of interest rate changes. You can also split your loan between different fixed terms to ‘split your risk’.

If you want to discuss how you can get off your mortgage faster, including possible lump sum repayments, please don’t hesitate to contact us. Mortgages can be confusing, and part of my role is offering you guidance throughout the process.