Fixed or floating
Sunday Star Times – 26/04/2009
Jo Kupa, Manager Roost
Question: I still have another two months until the end of my fixed-rate home loan. I tend not to do anything precipitously, which has, I feel, been my downfall in regards to my mortgage. Had I decided to break my mortgage before Christmas I could have locked it in for five years at under 6%. It is now 7.5% at my bank. At 6% I could have increased my repayments and got ahead on the mortgage. Instead I sat like a deer in the headlights and did nothing. I am now left with the idea that I shall put some of my mortgage on a longer term, and some on shorter, which will mean I get ahead, but not as fast as I would have. I have two questions, though:
The first is, do you think the five-year rates are still good value, or should I stick to shorter terms. They seem to have gone up very fast and I hope they could come back from here as quickly.
The second is, should my bank have told me that I could have benefited from breaking my mortgage? I was so near the end, and rates were dropping so fast they must have known that would have been a prudent thing for me to do.
Jo writes: Don’t beat yourself up for not having acted earlier; we can often rush, rather than looking at the long term.
By sitting and waiting you have had time to think about the decision that best suits you. We have seen a lot of movement with interest rates over the past months, so making a decision to break a rate can be quite complex. Banks are obliged to publish their current interest rates on offer but are not obligated to advise you to break the agreement you have with them. By signing a loan agreement form you are saying you agree with both the conditions and the ’terms’ of that particular loan.
If we look at the full term of a mortgage, the average interest rate over the lifetime of a 20 to 25-year mortgage or longer might be 7-8%. That’s not too bad.
Looking at ways to get ahead: you may be able to make lump sums or increase slightly the repayments to you fixed rate. Some lenders allow this without penalties.
Another option is to place portion of your loan on a floating rate rather than fixing it all and you can increase your repayments or make lump sums to this facility. Just don’t get caught in the trap of redrawing too much of what you have already paid off on your floating portion.
Another option is to talk to your mortgage broker about a transactional loan with a reducing limit where your income can be paid directly into the loan. This way you are in control of your situation and the bank is not so much in control.
You can still get ahead with the right guidance.