While an affordable home loan used to be considered no more than twice the annual household income, limited housing availability, higher property values, and increasing debt limits have driven that level up to an average home loan value of four times the annual household income. Add interest – even at the current low rates – and you’ll start to count every penny being poured into your home loan.
One way of making your home loan work more efficiently for you is to make sure you have the right structure in place. As with the type of home loan you choose, deciding on the structure within that loan is very important too.
So begins the great debate – to fix or to float?
You should consider fixing your home loan if:
- You want to take advantage of the current low fixed interest rates. At the moment fixed rates are as low as 4.19% – and could be driven even lower with the right negotiations – so fixing at these rates is a great way to play it safe with your home loan.
- You think the interest rates may be on the rise. Locking in a low interest rate before a rise can save you on two fronts – money and stress.
- You’re happy with your current repayment structure. You’ll have the added security of knowing just how much and how frequent your loan repayments will be over the period you fix for – this can be a life saver for healthy financial planning.
You should consider floating your home loan if:
- You think you may be in for a lower interest rate in the near future. Floating gives you the flexibility to take advantage of a constantly changing market, and as interest rates have slowly declined over the past year, it is possible that interest rates could fall even lower.
- You think you may be able to pay a little more towards your home loan in the near future. You may be due for a pay rise, or some other windfall that you want to invest into your home loan. This is a great idea! The interest saved on your home loan with any extra payments will be worth far more than any interest on a savings account in the long run.
- You like to take calculated risk. While there is every chance that rates could rise at any time, there’s a good chance they could dip even further.
You should consider a split between fixed and floating if:
- You want to play it safe. You’re keen to take advantage of the current interest rates, but don’t want to miss out on any potential interest rate drops in the future.
- You like the financial security that fixing will give you, but want the flexibility to pay off some of your loan faster too. By fixing a portion of your loan, your repayments will be scheduled over the period and you’ll know what to expect, while leaving a portion of your loan floating will enable you to increase your repayments or make one-off additional repayments without penalties.
- You want to spread your risk equally. This is pretty self-explanatory – splitting the risk means having your cake and eating it too.
There’s more than one way to structure your mortgage, and choosing the right structure for you will get your money working for you in a more positive way. Even though a home loan is a long term commitment, there are still plenty of reasons to make changes to your home loan that you will benefit from in the short term too.
The decision to fix, float, or split between the two will come down to what you want for your short to medium term cash flow, how much risk you are willing to take, and your long term home loan goals. If you’re still unsure about what would work best for you, you are welcome to contact the team at Sam Kodi.