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How long should you fix your mortgage for?

Managing a mortgage can feel like a big responsibility. It’s often the most significant debt that people have in their lives and one of the biggest payments they make each month.

But with so many options, how can you know the best way to structure it? Should you float, fix for a short term or lock it in for a longer haul? Are interest rates going to fall further, or should you lock in a rate now before they increase?

The bad news is that there’s no right answer that will suit everyone.

The good is that we can help you figure out what the right option is for you.

Most lenders let you lock in an interest rate for terms ranging from six months through to five years. There’s also the option of floating, where your loan interest rate changes according to shifts in the market.

Here are some things to think about before you decide.

What rate is being offered?

While no one has perfected the crystal ball method of interest rate predictions yet, you can compare what you’re being offered to what you think might be going to happen to rates from here.

At least for now, there’s little indication that rates are going to fall dramatically further, and they may start to creep up in time – although most people expect that not to happen quickly.

Most economists say at present that a series of one- or two-year fixes should provide a better rate overall, and a lower interest bill, than fixing for a longer term right now. Interest rates, they say, should still be low enough at the end of one of those terms. You could then re-fix at a rate that’s still more economical than paying a premium for a longer one now.

But that’s not the only consideration that matters.

What are your plans?

Most people opt to fix their mortgages because fixed rates are cheaper than floating.

But if you know you’re about to put your house on the market and might want to pay your mortgage off within the next couple of months, floating may be a better solution.

If you think your income might increase in the coming years, or you’re expecting to receive a lump sum of money, such as an inheritance, you might opt for a shorter term fix to allow you to put up your repayments, or pay off a chunk of your mortgage, without any penalty.

Want certainty of payment?

It’s not possible to accurately predict what might lie ahead. How comfortable you are with that will play a part in the term you choose to take.

Generally speaking, if you’re looking for certainty of payment, fixing for a longer period may be a good idea, especially while rates are at their current lows. But at the same time, you may not want to fix for too long – if rates were to go down further, you would be able to fix at a lower rate sooner; and if they went up, the increased payment would likely be lighter on your budget than if you fixed for longer.  

Whatever rate and term you choose, you need to be comfortable with your decision and understand your reasons for the decision.

Do you want to split it?

An option to get the best of both worlds could be to split your loan into several smaller amounts. This means you can fix some for a short time and some for longer, so that you never have the whole lot roll off a fixed term at once – even if rates have risen by the time the term expires, you aren’t fully exposed to that change.

Wondering what to do? Give us a call today. We can explain what’s on offer and how to structure your loans to get the right fit for your circumstances.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.

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