In the home loan market in Australia, many people have been able to take advantage of the low interest rates. Today, fixed rates are still much lower than the SVR (standard variable rate), which means that, if you fix your rate now, you could save a lot of money. However, while there are advantages to fixing your rate, there are also some disadvantages, and you should also take them into consideration before making a decision.
In July 2016, 13% of all new home loans were fixed rates, which is an increase of 3% year on year. Although the majority of people still take out variable rate loans, the fixed rate options are clearly catching up. The Reserve Bank of Australia has stated that the average rate for a three year fixed mortgage was 4.25% on July 31, 2016. At the same point last year, it was 4.65%. The average SVR is 5.40%, and discounted variable home loans are 4.60%. Looking at these figures, fixed rate loans seem like a good idea. However, they are a lot less flexible, and you do need to consider that. Let’s take a look at all of the important aspects.
The Importance of Timing
If you believe that the variable rate will not decline any further soon, the time has come to fix it. Obviously, this is because you would only get some savings if overall rates will rise. However, it is all but impossible to accurately predict whether the rate will rise, decrease, or remain stagnant. Hence, if you guessed wrong and the rates fall further, you will actually be spending more in the long term than you would have with a variable rate loan. That said, the economy in Australia and the world as a whole is becoming stronger, so it is likely that the rates will rise. By fixing your mortgage now, you won’t have to worry about your repayments rising.
From that perspective, a fixed loan is a type of insurance that guarantees your repayments won’t change for a certain period of time. However, that guarantee can come at a price. You may, for instance, have to pay a “Lock-in-Cost” of between $500 and $750 for each mortgage. Furthermore, there are other factors to consider as well.
Generally speaking, lenders impose a limit on the number of repayments you can make on a fixed mortgage. Some do not allow any repayments at all, while others set a limit of between $10,000 and $15,000. It is very rare to find a lender who would allow a repayment of more than $25,000. If you do want to pay more, you will have to pay a penalty as well.
If you pay off a fixed loan before the end of the term, you must also pay for break costs. This covers the economic loss of the lender. These fees can be thousands of dollars, so you do have to be aware of this.
Offsetting Your Home Loan
Usually, fixed loans cannot be offset, while variable loans can. When you offset, you can cut the cost of your interests significantly by putting your savings towards the balance of the home, without actually losing access to your savings. There are some exceptions, and some lenders now allow partial offsets on a fixed rate loan. This is also something to take into account.
The Split Option
In a split mortgage, a part of your loan is fixed, while the remainder is variable. This gives you a degree of protection if the interest rates rise, and at the same time, it gives you more flexibility if you want to make more repayments without incurring penalties.
There are hundreds of lenders out there, each with unique products that you can choose from. This means that there is quite a lot of complexity involved in it as well. There is strong competition between lenders, which means they are usually happy to discuss these options with you, and even negotiate.
You may, however, want to speak to a home loan broker. These brokers will look at the market and find you the most competitive home loan for your particular circumstances. Additionally, they have a lot of knowledge that can help you with your application, and they may even be able to negotiate on your behalf. Usually, the lender you end up choosing will pay the cost of the broker, although they may also charge a percentage of your loan. However, full transparency must be provided about this.
Before you decide to fix or not, make sure that you understand all the pros and cons. Speak to a financial advisor if you are unsure and consider a home loan broker to help you find the best solution.
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