Q: I have a $350,000 mortgage at a variable rate of 4.44 per cent and I see fixed rates are now under 4 per cent. I’m also nervous because my lender has just put up my rate. Should I fix now?
A: Many lenders are making out of cycle home loan interest rate increases at the moment to meet new regulatory demands and to cover their own rising costs of borrowing money. Only customers on a fixed interest rate have been protected from these rate rises.
However, interest rates still remain at historically low levels, and fixed rates can represent excellent value. Along with the really competitive interest rates that are currently available, fixed rate home loans provide certainty about repayments which is ideal for anyone on a tight budget.
It’s important to choose the right type of loan for you, and there are some limitations with fixed rates that you need to be aware of:
- Fixed rates are typically inflexible in terms of repayments; many don’t have an offset facility or allow extra repayments;
- This may seem obvious but they lock you in so even if variable interest rates fall your rate stays the same; and
- They usually have penalties if you break the fixed term early so you need to be sure that the fixed term suits your future plans.
When choosing a fixed rate, remember to:
- Look at the comparison rate and not just the headline low interest rate. The comparison rate reveals a truer cost of a home loan, because it includes the interest rate and most of the fees and charges relating to a loan, combined into a single percentage figure; and
- Look at what happens when the fixed rate ends, known as the ‘revert rate’, unless you plan to refinance at the end of the fixed term.
I believe, along with many economists, that there are probably at least one or two more rate cuts coming from the RBA, so it might also be worth considering whether it’s too early to fix.
Competition is hot and should continue to heat up especially if the RBA cuts rates further, so it’s very possible that we will start seeing more fixed interest rates starting with a 3 over the coming months.
You don’t have to fix your whole loan though, so splitting your mortgage into fixed and variable portions can help you to hedge your bets a little. This lets you combine some certainty about repayments and low rates with access to changing competitive rates should the RBA cut rates.
If you’re considering fixing all or part of your loan you should speak with an accredited mortgage broker who will not only be able to tell you more about the features of fixed rate loans, but also compare the different rates and loans available to find one suited to you.
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