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During every home loan process, the question always arises: fixed or variable? As brokers, it is important to assess the risks involved with recommending fixed rates to clients.
A fixed rate can seem like a good option to many clients, as they feel comfortable with the idea that their repayments won’t rise during the fixed period. For brokers, it can be easy to play into cautious clients’ hands and advise them to fix their rate.
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Clients should be made aware of sacrifices they are making when entering into a fixed-rate contract with a lender. If rates were to drop, clients need to understand that their repayments will still remain the same. They need to be aware that they can’t make additional repayments, and there can be break fees if they want to pay off the loan early or if they sell the property.
Some experts see the fixed-rate loan as a variable loan with an insurance premium on top – the premium being the difference between the fixed and variable rates. Several studies have shown that over time, the variable-rate loan is not only the most flexible, but also less costly than a fixed-rate loan.
There is also the option to recommend a split loan, and many clients would see this as the best of both worlds – having loan flexibility as well as the protection of a partially fixed rate. But this shouldn’t be an easy fall-back option and clients need to be made aware of all restrictions.
An experienced broker will get a feel for the general patterns of rising and falling rates over time, but rates are still difficult to predict and it’s not a broker’s job to make specific predictions for clients. A broker’s job is to make the client aware of what the potential implications of their loan choice may be and to get a suitable fit for clients.
All clients should understand why they have the loan they do and how the features and benefits match their needs. By educating clients in the beginning and helping them make an informed decision, there will be less chance of a client being unhappy with their loan in the future.
