Low Fixed Rates: A Blessing or Booby Trap?

To Fix or Not to Fix?

This question comes up often, particularly when interest rates are low and Lenders are heavily marketing their fixed rate loans. To help you make an informed decision we created a Fixed Rate Checklist.

The most common fixed rate loan products that are taken by Australian borrowers are 3 and 5 year terms.

When considering whether to lock into a fixed rate term loan the first and most important thing to remember is that you as an individual will have different circumstances, goals and needs to other people. For this reason it is pretty much impossible to give a standard answer that fits all individuals and is therefore suggested that you engage a professional to assist with a Strategy Session.

SVR (Standard Variable Loans)

Before we delve too deeply into Fixed Rate Loans it is important to first understand the other option for Australian borrowers, which is a SVR (Standard Variable Rate) loan. The most common home loans and investment property loans in Australia are based on a SVR (Standard Variable Rate).

The SVR fluctuates during the life of the loan in direct correlation with the RBA's (Reserve Bank of Australia) cash rate. Banks and Lenders add a margin onto the RBA Cash Rate of around 3 per cent to come up with their SVR that is offered to the home loan customers. In addition the Banks will usually offer discounted rates of between 0.5 per cent and 1.0 per cent, which is taken off their advertised SVR.

For example if the RBA Cash Rate is at 3.0 per cent the Retail Bank may create their own SVR of 6.0 per cent to build in a profit margin. As part of their marketing methods they will then most likely offer a range of discounts on their advertised SVR. For example, they may offer a discount of say 0.9 per cent to new customers borrowing over $500,000 which would mean the customer delivery rate would end up being 5.1 per cent.

Fixed Rate Term Loans.

When fixed rates are available at low levels a lot more people start thinking about locking their mortgage into a fixed rate, which is exactly what the Banks and Lenders want you to do.

Unfortunately some people actually do not ask for help regarding fixed rate loans and commit without fully understanding the associated pitfalls. This is often the result of being “caught up” in the clever marketing spin that the Banks and other Lenders use. You can’t blame the Banks and Lenders for wanting to “lock in” customers to a fixed rate product but you need to be fully sure that it is the right decision for you.

In some cases it can be an excellent strategy to lock your home loan and/or investment loans into a fixed rate term, however there are a few areas that borrowers need to be aware of when making this important decision.

It is also important to remember that when asking for advice on what type of product best suits you that your local Bank Manager or Bank Loan Officer will be somewhat restricted with their recommendations. They can only offer you their own Bank products and will be keen for you to lock into a fixed rate product to keep you tied to their Bank for the longer term. This is a simple fact of life but is often forgotten when sitting with loan providers.

Which interest rate product would best suit you?

Before you rush out to secure a fixed rate, remember that rather than trying to pick the bottom of the interest rate cycle you should be looking for a rate and product that you are comfortable with and that fits with your overall goals and investment strategies.

Remember, Fixed Rate Loans remove all flexibility and tie you to a particular lender, this often can prevent you purchasing more properties to expand your property portfolio (massive break costs apply to all fixed rate loans which make it unviable to leave the lender and therefore investors often miss out on excellent buying opportunities)

Lastly, the Banks and their Loan Managers are trained well to hone in on your interest rate fears to get you to "Lock in" to one of their Fixed Rate Loans.

By getting you to sign up to a Fixed Rate Loan it almost guarantees you will not be able to leave that Bank for the next few years and therefore deliver them increased profits. This is just good marketing by the Banks and there is nothing wrong with that, provided a Fixed Rate Loan is actually the most suitable product for your individual needs today and long into the future.

Closing Comment:

I would urge you to undertake a comprehensive Finance Strategy Session to help you make the right decision regarding To Fix or Not To Fix.

Download our Free Checklist - Benefits & Pitfalls of Fixed Rate Loans

Any Questions? Ask Darryl Here

About Darryl Simms



Darryl Simms specialises in helping individuals invest in property for less than a latte a day, reduce their tax and create enjoyable lifestyles.

As the Founder of Latte Property, Darryl willingly shares his extensive knowledge built up over the last 25 years to help clients create wealth through property investment.

Latte Property has a large following of successful property investors who have enjoyed professional guidance in the purchase of quality new apartments, new townhouses and new homes.

Darryl is also the Author of “50 Must Know Property Investing Tips” and is currently busy writing his next Property Investment publication.

Darryl’s favourite quote is:

“Try not to become a man of success, but rather try to become a man of value” – Albert Einstein

Contact Darryl at www.latteproperty.com.au/ask-darryl


Written By Darryl Simms First Published on Linkedin Pulse

Download our Free Checklist - Benefits & Pitfalls of Fixed Rate Loans