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Why we don’t often suggest splitting your fixed rates

I'm going to throw a cat amongst the pigeons of conventional wisdom here but I'd like to put it out there that I'm not a fan of splitting your fixed rates by fixing over different terms.

What is this that you're talking about, Adam?

There is an long held belief in some parts that you should fix your lending for different terms.  

Say if you had a $500K mortgage you might fix $100K for 12 months, $200K for 2 years and $200K for 3 years.

The theory is that you are insulated from any rate increases because not all of your lending is coming off at the same time.  It might seem obvious, but you're also insulated from rate decreases for the same reason.

The fact we've broadly been in a decreasing interest rate market since 2008 makes it even more absurd to follow this traditional logic.

Right, so what should I be doing instead?

There are two very simple things you should do when choosing a loan structure 

Firstly you should assess the market, or have your Mortgage Broker do it for you.  There's no point fixing for 5 years when the economists are predicting lower rates in a year's time.  It's not always easy to see and beware of the Herald or similar pointing you in a direction which may not be relevant.  

We live and breathe the fluctuations of the market and are here to help navigate that for you, most importantly we'll stand by our recommendations as we're doing it ourselves. 

Secondly you need a structure that is going to fit your financial goals.  We'll work through a simple plan with you so that you're not just making knee jerk fixed rate decisions but you've got a structure that fits the way you want to live your life and what you want to achieve. 

Ok, so what are the reasons not to split my fixed rates?

  1. You never get to experience the lowest rates (but in theory also miss the highs)
  2. You get interest rate envy and this may lead to large break costs
  3. You're tied to one bank as there's always a cost to leave

Missing the highs is important but like any market, you can only see the high and low point once you have passed it.  Doing the right thing at the time, with the advice and information available is going to deliver you the most gains.

If you had split your lending in 2019 and fixed part of it for 3 years you would have had a rate of around 4.25%.  Only a year later the market is around 2.5%.  Covid aside, the indications at the time were of rates softening in 2020 so blindly splitting your loan to fix longer was ignoring these factors.  

Which leads to the next issue... no one wants to be paying a high rate and have the banks advertising their lowest possible rates to you wherever you look.  The reality is that no bank is going to simply let you switch to a lower rate, there will be a break cost for doing this and it's generally about the same as the money you'd save.  By the time the rates have dropped, it's too late.  

Then there's the issue of leverage... If you've got a fixed rate expiring but still have other loans tied in with that bank, then you can't leave them without breaking the other loans and paying a fee for doing so.  That diminishes your leverage with your current bank and also cuts off possibly better options at other lenders.

Loyalty is important but if you're paying above the market then it's our job to ensure you're keeping more of your money in your back pocket, or paying your mortgage off faster and having that flexibility is a key part of that. 

But what if I'm worried about rates increasing?

This is a real consideration.  A mortgage is a large financial commitment and it's important that you can have some consistency for your budget.  For most people this is relatively tight and you need to understand your costs.

That does not mean you should split your lending to protect yourself from increases though.  It means you need to set a budget and make a financial plan... two things that we can help you with. 

If you know your income/expenses are going to be consistent for the next 5 years then it doesn't make sense to play the interest rate market, you may simply be best off taking a 5 year fixed rate.  That gives certainty for your family and moves you forward with your financial goals.

If you've got children going to school in a couple of years and both parents returning to full time work then you may want to plan around this.  Fix for 2 or 3 years and review your budget at that point, even if rates have increased by then you'll have more income to cover the higher payments.  But if they've dropped it doesn't matter, you needed to take out the insurance of a fixed rate that gave you certainty of payments and it was worth it.

I'm over-simplifying it here but it's this financial advice that gives you a lot of value from using a Mortgage Broker.  We've got a lot of experience in hundreds of different scenarios, plus we know how each bank product can be tailored to fit you.  

I'd love to help more people get the right structure and pay off their home loan faster, so if this was interesting then please share it with someone who may find it helpful or click the "Contact us" button at the top of the page to get in touch.

We love saving people money! 

Adam and the My Mortgage Team