To fix or not to fix?

Interest rates are at their lowest since late 2009, and it’s prompting many home owners to consider locking in their home loan rate. If you already have a home loan, chances are, it has a variable – or ‘floating’, rate that moves up or down over time. Exactly when, and by how much variable rates move, depends on changes to the Reserve Bank’s official cash rate as well as developments in global money markets that impact a lender’s cost of funding. The key thing for home owners is that a variable rate brings the likelihood that your rate – and monthly repayments, will rise or fall over time.
A simple way to overcome this uncertainty is by locking in to a fixed rate.What does‘fixed’ mean? As the name suggests a fixed rate will remain the same for a specified term – usually one to five years, regardless of how market rates
move. Because the rate is constant, so too are your regular repayments. Once the fixed term ends, borrowers have the
option to lock in their rate for another period (at the prevailing fixed rate), otherwise the loan simply reverts back to the lender’s standard variable rate. Fixing becomes more popular While the majority of borrowers choose a variable rate loan, government figures1 show that over the past year between 10% and 15% of home owners opted for a fixed rate. In January 2013, 12.2% of borrowers locked in their rate, up from 11.5% a year ago. Weighing up the benefits Show that over the past year between 10% and 15% of home owners opted for a fixed rate. In January 2013, 12.2% of borrowers locked in their rate, up from 11.5% a year ago. Part of this increase can be attributed to the current crop of highly competitive fixed rates. As the global economy strengthens, there is a possibility interest rates won’t go much lower,
which could make now the time to fix. Along with a low rate and protection from possible future rate hikes, fixing your loan brings certainty of repayments. This can make your mortgage easier to budget for. But it’s not all beer and skittles with a fixed rate. You won’t benefit from any rate falls that may occur during the fixed term. So you run
the risk of paying higher repayments than if you’d stayed with a variable rate. If this happens, most lenders will let you switch back to a variable rate before the fixed term lapses but that could mean facing ‘break charges’. It’s a cost that can run into several thousand dollars depending on how rates have moved, often making it uneconomic to bail out of a fixed rate prematurely. Split it! Happily there is a way to combine the certainty of repayments of a fixed rate with the flexibility of a variable rate loan and that’s by splitting your mortgage between fixed and variable rate components.The super way to buy property If you manage your own superannuation fund, you might want to consider increasing its value by using it to invest in property.Since 2007 Australians have been able to buy property through Self-Managed Super Funds (SMSFs), and take advantage of the tax affective investment strategy this can potentially offer. It is a practice that is growing in popularity, with figures from the Australian Taxation Office (ATO) showing a 40 per cent increase over four years in the use of SMSFs in residential real estate. Tax benefits through SMSFs
One of the advantages of buying through your super fund is the ability to reduce capital gains tax payable on the profits realised when you eventually sell the property. This can be reduced potentially to zero once you begin
drawing down a pension – making this is a great option for buying a retirement home. Also, expenses such as interest payments,council rates, insurance and maintenance may be claimed as tax deductions by the SMSF, and rental income is only taxed at 15 per cent, or not at all in the pension phase. Considerations It’s important to note, investing in property through a SMSF is not as simple as buying a regular investment property and loan costs are generally higher.
SMSFs can be used to buy any form of investment property (residential or commercial), but it is imperative you understand that it is an arm’s length transaction. Neither you nor any relative can live in a property that your SMSF owns, nor can a SMSF be used to purchase from a related party.There are a number of additional considerations. Firstly, if you are seeking finance you will need enough money in the SMSF to cover the deposit and other upfront
costs, which are usually higher than for a regular investment loan. You may only be able to borrow between 70 to 85 per cent of the property’s value, and interest rates may be higher. And of course you need to satisfy to the lender that you can top up your SMSF to cover the cost of mortgage repayments. Your broker can help you determine whether
investing through a SMSF is the right option for you. If you’re considering this type of arrangement, get in touch with Navjeet Matta to discuss your options. Return to top “Honey, I shrunk the mortgage!” Pay off the home loan early? Yes, it can be done, and a few simple lifestyle changes can go a long way to becoming mortgage-free faster. Having control of household spending plays a