Three questions you need to ask when refixing your mortgage rate

In the past, deciding whether to fix your mortgage for a short term (one to two years) or lock in a longer term ( three to five years) has been one of the key decisions for anyone with an interest rate that is due to mature. But with interest rates looking likely to go down even further in the middle of next year, most people are opting for a shorter term and there are therefore other, more pressing, questions that need to be considered.

1. Am I going to sell my house in the next three to six months?

This question should always be considered because fixing your mortgage can mean break costs if you sell before the next maturity date. At the moment, however, it is particularly relevant to people who have found themselves with reduced income who may consider selling their property as a means to be able to survive until they find more work.

Leaving your mortgage on a floating rate - which is what occurs if you don’t fix your mortgage - means paying a higher interest rate in the meantime, though. You would want to know you are selling or to make the decision reasonably quickly, for the “floating rate” option to be the better one. And you would want to be sure you were going to put your house on the market in the next three months (meaning settlement would usually be four to five months) for floating to be a better option than fixing for one year.

2. How confident am I in my regular income over the next year?

It is always good to make additional payments on your mortgage, but if your income is uncertain you may not want to commit to higher payments on your fixed rates for the next year. There are a few other ways that extra payments can be made onto a mortgage, either through lump sum payments or through Revolving Credits / Offset Accounts. If you are not confident in your employment or income stability, consider paying off your mortgage in a way that you still have access to those payments if you lose your job.

3. Should I make my mortgage interest only for a short time?

By default, the banks like home-owners to be paying down their mortgage. As your debt reduces, the bank’s loan to you is more secure (they are loaning you a lower percentage of the house’s value). So for quite a while now, they have enforced a maximum of two years of interest only on mortgages.

But if you are uncertain of your income or have some unexpected increases in your expenses (illness is a typical example of this), it can sometimes be beneficial to ask to put your mortgage onto interest only for a short time. It reduces the minimum amount that you regularly need to pay the bank and means you can divert your income to the more pressing expenses. You can also mix this Interest Only option with the Revolving Credit option above meaning you can still pay down your mortgage in the meantime but if you really need to reduce your payments, you’ll only be paying interest only .

Note: some care should be taken with this strategy; most importantly making sure that the reasons you are choosing interest only are for important reasons not for luxury/lifestyle reasons.

While getting the cheapest interest rate is great for your mortgage, make sure to spend 10 minutes planning out your next one to two years and running through a few worst-case scenarios to make sure, if unexpected changes occur - particularly in your income - that you have the means to carry on paying your mortgage.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.