Fix for 2 or 4 years?

Hi All,

In the market to apply for a new home loan. First time house buyer. Have spoken to a few banks where some are providing loans at 2 or 4 years fixed.

Is it a good idea to fix for a longer duration like 4 years (under 2% fixed) or stick with 2 years (under 2% fixed?

Any help on this would be really appreciated.

 

My personal opinion, 4 years is generally too long. However if youre borrowing at an high LVR and the rate difference between fixed and variable is significantly different ( most likely) at your lender then 4 years could be an option.

 

Thanks Tony for the response. It's 1.99 fixed and 2.65 variable for 4 years.

LVR is around 85%.

Would it still be advisable for 4 or should I do 2 years?

 

Interest is never the only consideration.
Do you plan on saving a decent amount over the fixed period? If so, and it’s ppor, whats the cost of not having an offset? Your marginal tax rate might play a part here.

 

Not having a better discussion I can't comment too much, however it's advisable to have a portion variable which it looks like you are.

 

Planning to do 90% fixed and 10% variable.

Yes planning to save a decent amount and also for things to settle in since it's going to be our first house.

 

i dont understand what this means.

how much as a % of the loan are you planning to save over 2 years and 4 years?

 

I think I saw an ad for a fixed loan WITH an offset recently.
Can anyone confirm?

 

Yes. There's a small group of lenders offering fixed rate loans with offset accounts.


@Marc009 if your main concern is to save money, then good structuring with a 4 year fixed rate at 1.99% is probably going to do quite well. I can't predict what interest rates are going to do, but I think it's unlikely that the variable rates will drop below this level. Bad structuring might also cost you money regardless of what the rates are.

However fixed rates do commit you to that lender for that period of time. That might be okay or it might not. It depends on what your plans and expectations are for the next few years. Fixed rates come at the cost of flexibility, so planning and structuring for your future needs gets more and more important the longer you fix for.

 

Fixed rates for 4 & 5 years are on the way up at a few lenders, which usually means others will follow. If you are fixing for 4 years, you might want to pay the rate lock fee or you could end up with a higher rate than you are expecting. If you haven't bought yet, then this isn't an option until you do buy.

 

Chris, can you explain what you mean by paying a rate lock? Is this for the rate you would revert to when the fixed term is over?

 

Sometimes, between the time you apply for a loan and the time it settles lenders can increase their fixed rates. Eg you apply for a 1.99% 4 year fixed rate, but the lender increases their 4 year fixed rate to 2.10% before your application settles, you get the new 2.10% fixed rate.
Rate Lock is a fee you pay that ensures you get the fixed rate at the time of applying so in the event the lender increase their fixed rate prior to settlement you will still get the rate you initially applied for.
If you have a broker they will be able to discuss that option with you and whether they think it's required.

 

Ahh got it! Thank you Lindsay for clarification

 

I agree. Fixing for such long periods has always caused me grief.

 

What sort of grief? I’m looking at buying another PPOR and planning to not move again for another 10 years. Would fixing it for the first 4 year be ok?

 

• Rates dropping (less likely right now)
• Refinancing / restructuring loans
• Selling

 

I would advise against 4 or 5 year terms. I've screwed myself in the past fixing for longer terms. The maximum I do now is 2 or 3 years.

 

Yes 4 does seem like a long time. But I feel that our circumstances wouldn’t change much in this duration to make it not worthwhile. But then I’m also hesitant as well about the unpredictable future. It’s so hard to decide

 

Say at the time you got the loan, the interest rate for a 3 year fixed rate is %2.1. Then, you decided to sell the property after two years, and at the time you are selling the property their 3-year fixed rate has gone up to %2.2. I hear they will allow you to get out of the loan agreement without any penalty in this case?

 

What if the interest rate reduced in the period between loan application and settlement? Will they give you the new lower rate without penalty if you didn't lock the rate? And what if you did lock the rate, would they still allow you to go on the lower rate without penalty