For the past few years, not only have we been experiencing very low rates, but the variable and short-term rates (96 months to 2 years) have been cheaper than the long term rates. For this reason, many people have been opting to have their loans on the short term rates (mainly variable, 6-month, and 1-year rates).
However, given these short-term rates are rising at a faster pace, it is time to consider a few things:
More About Breaking A Fixed Rate
You may think that breaking a fixed rate will incur some form of penalty. But this is not always the case!
If your interest rate is lower than the variable rate, the chances are there would be no penalty to breaking your rate (this is a general rule). So if you took a 12 month fixed rate for 5.50%, the bank can take your money and put it in the market for 6.75%. Therefore, the bank makes money on breaking the rate. You don’t get this profit passed on to you, but you can re-fix now for a longer rate which can be more favourable.
Below are general guidelines regarding breaking a fixed rate:
- When rates are increasing, the chances of a penalty is slim.
- When rates are decreasing, the chances of a penalty is high.
- The break penalty depends on many variables: what the bank's buy in rate was at the time, the rate at present, how long you have to go on the rate and so on.
The problem is the formulas can be too complex for you, me, or anyone to actually work it out. I personally think that this is wrong as I personally believe that everyone should clearly be able to understand their contracts for fixing. But, that is a story for another day!.
When you choose to fix a rate, whether it be from a variable rate to a fixed rate, a fixed rate to another fixed rate, breaking a fixed rate, or refixing, the banks can also charge an Administration Fee.
The good news is, when you work with a Mortgage Adviser, they can choose to get these fees waived. If you choose to work direct with the bank, DO NOT pay these fees as they can cost over $300.00!
How Long Should You Fix For?
This is the million dollar question. The problem is, everyone has their own set of circumstances to consider.
Here are a couple of guidelines to keep in mind:
- If you have more than one loan, you may want to spread out the expiry dates of these loans. For instance, consider a $200,000 loan fixed for 3 years and $200,000 fixed for 5 years. This means that if the rate in 3 years in high, the impact of this rate will only affect one loan.
- If you are thinking about selling a property and don’t want to fix for a longer period, you can:
- Fix for the shorter term. However, remember that you could be on a higher rate when it expires and that you should plan for this possibility.
- Fix for longer. If you fix for 4 years, and in 2 years you do decide to sell with higher interest rates, the chances on incurring penalty is slim. Note that this does have an element of risk, as anything could happen. But, if you do choose to not sell, you then have the benefit of the longer term rate.
- If you are selling and buying you can transfer the mortgage from one property to the other.
Negotiate, Negotiate, Negotiate
Here's a final, but very important tip for you. The interest rates that the banks promote can usually be negotiated on!
Sometimes, there are specials rates which are non-negotiable. But, for the most part, you can get interest rate discounts.
Also, note that the discounts are for everyone with 80% lending or less, and larger for those with lending above $250,000.
The discounts may also be bigger than a current employee package.
If you are not really sure, then speak to a Mortgage Expert! They could save you a fair bit of money in this process!