Paul Clitheroe - fixing your loan - think first
19 Sep 2011
ipac Paul Clitheroe
my weekly view
The Reserve Bank may have kept the cash rate on hold for September, but since the start of August fixed rates on home loans have been falling. Around 60 per cent of lenders have cut some or all of their fixed rates, and there are some good deals up for grabs. But think carefully before committing to a fixed rate home loan as there are also potential downsides.
Based on figures from comparison site RateCity, some of the biggest slides in fixed rates have occurred among non-banks lenders. Austral Mortgage for instance, cut its fixed home loan rates by up to 1.16%. Others, like mortgage company Homeloans, trimmed 1.05% from some fixed rates.
On a 3-year fixed home loan, the most popular term among borrowers, you can now pay as little as 6.39% with CUA and ING DIRECT. That’s about 0.91% below the average standard variable rate of 7.3%.
But regardless of whether you think rates will head up or down in the future, there are good reasons to look beyond a great rate before locking into a fixed loan.
An important step is looking at the lender’s ‘revert’ rate. That’s the interest rate you’ll pay once the fixed term expires – and it can be higher than the fixed rate you were paying.
As an example, let’s say you take out a $300,000 mortgage repayable over 25 years. For the first three years you fix the rate at 6.39%, then continue the loan paying a revert rate of 7.22%. Under these circumstances, the total interest bill over 25 years would come to $339,522.
Alternatively, you could opt for one of the cheapest variable rate loans, and pay around 6.97% (and there are a number of lenders charging less). In this case, you’d save $22,000 on the long term interest bill by going with a variable rate loan even though you’re paying a higher rate initially.
Bear in mind too, if you want to bail out of the fixed rate before the full term is over, you could be slugged with some very solid ‘break’ costs. How much you pay will depend on how market interest rates have moved since you fixed your rate, but the cost could run into thousands of dollars.
On the plus side, fixed loans are becoming more flexible. Many allow borrowers to make additional loan repayments, generally up to $10,000 extra each year. And, if your budget would be thinly stretched by any future rate hikes, fixing can give you certainty over your repayments.
If you’re keen to lock into a fixed rate, check to see if your lender offers the option of splitting your mortgage into fixed and variable rate portions. This is a bit like taking an each way bet on future interest rate movements, but it’s one way to take advantage of low fixed rates while still getting the benefit of any possible future cuts in variable rates.