Thursday, July 25, 2013

To Fix The Mortgage Or Not Fix?

Now that we are thoroughly settled into the house and getting used to the new local amenities, travelling arrangements and so forth, it's time to review our finances again.

With a few mortgage payments already made, there's a little bit of routine happening now. Bills are coming fast and furiously with the multiple investments assets but that's fine because the bad stuff(bills and expenses) is exceeded by the greater positive stuff(investment income).

Currently, mortgage interest rates are at historic lows and looks to be staying that way indefinitely until our economy improves. Particularly the mining industry which is in the doldrums and majorly affecting government tax revenue, thus curtailing the government's spending in relation to social welfare and spending on infrastructure.

To Fix Or Not Fix The Mortgage Rates?

Hamlet(or rather Shakespeare) posed the question, "to be or not to be?" ... although he faced an existential crisis, our crisis is not as dramatic but rather a financial issue.

While interest rates are at record lows, they can be lowered even further. However on the other hand, if the economy improved then the rates would head upwards again to curtail inflation. 50/50 really.

The house mortgage is currently a 100% variable mortgage loan attached with features such as unlimited repayments, ability to redraw, 100% offset facility and the interest is at 5.25%. 

If we were to fix, the interest rate would be 4.99% with the option to fix for two or three years. By fixing a portion of the mortgage, that fixed portion would then be stymied by the ability to only make a maximum of $10k in extra repayments per annum and there's probably a limit applicable for redraws(will have to check the terms and conditions), penalties and limits to loan portability, penalties on breaking fixed loans and the offset account will no longer be 100% offset against the fixed loan component.

I've been contemplating on fixing 50% of the loan because I prefer certainty to uncertainty and if interest rates were to drop further, that's okay. BUT if interest rates were to rise then that could possibly hamper our lifestyle somewhat and pose new financial challenges. 

Property Planning Australia wrote a short little article which illustrates reasons that are to be considered prior to fixing which I thought was rather useful and may be of help to you if you're facing a similar scenario:
"• Would you like more certainty in knowing what your loan repayments will be?• Do you feel like you are stretched with your cash flow?• Do you have little equity or cash buffer to draw upon if things got tougher?• Are you risk averse?• If rates kept going lower after you fix, would you be comfortable knowing that you cannot access the lower variable rate without a hefty penalty that would almost certainly make it non-beneficial to get out of your higher fixed rate?• Are you confident that you will not sell your house or want to refinance during the fixed rate period?• Do you have non-deductible and deductible debt, and would you feel more comfortable knowing that you had a set repayment for part or all of one or the other?
If you answer yes to many of these questions, then you are starting to build a case for fixing your debt."
Did You Know That You Can Fix Your Mortgage Loan In Multiple Structures?

I was thinking about fixing and how it would throw a spanner in the works against making unlimited extra repayments due to the $10k limit on extra repayments...then the question arose, what if we could have multiple fixed portions? That would mean the extra repayments would only be capped by the structure that we've set up. Thought that was too good to be true, however a trip to the bank confirmed that YES it was possible to have several concurrent fixed loan components and each fixed loan component has the facility to accept $10k in extra repayments per annum!

That means that instead of the original structure that I was considering, I could have a better structure that was more flexible. We could even have 5 fixed loan components which would allow $50k in extra repayments per annum in addition to the unlimited extra repayment on the variable portion if we were really that flush with spare funds.

Structure 1: 
50% variable at 5.25%, 50% fixed at 4.99% for two years
Thus extra repayments on fixed portion capped at $10k per annum while extra repayments on variable portion is unlimited

Structure 2: 
50% variable at 5.25%, 25% fixed at 4.99% for two years and 25% fixed at 4.99% for three years
Thus extra repayments on fixed portions capped at total of $20k per annum while extra repayments on variable portion is unlimited

When I queried the branch manager on why people didn't structure their loan with the greatest flexibility, she replied that not many people knew about structuring and even if you tried explaining or suggesting the structure to them they would get confused, so her work was to help people arrange what they wanted.

As mentioned before in previous posts, I haven't got a crystal ball for the future, however with our current loan, I would like some certainty regarding mortgage repayments. On the other hand, I don't want to limit our ability to make extra repayments so the best option for our scenario is to go ahead with Structure 2 and restructure the mortgage into three parts. 

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