Australian home owners are currently enjoying the savings they’re making on their mortgage repayments thanks to all-time low interest rates.
Home loan fixed rates currently sit well below the standard variable rates (SVR) so, at the moment, it’s possible to cut your interest costs by fixing.
However, although a fixed rate home loan can offer good protection against rising interest rates, it’s important to consider all aspects of fixed loans, which are generally far less flexible than their variable siblings
The ideal time to fix a rate is when variable rates don’t look like they will fall any further in the short to medium term, however predicting interest rates is nearly impossible historically. If interest rates fall, you will still be stuck with the rate you locked in for the duration of your fixed loan, potentially costing you far more over the long-term.
However, if interest rates rise as a result of improved economic growth, your interest rate costs and repayments won’t rise during the duration of the fixed loan term even if variable rates rise.
Essentially, fixed loans are like a form of insurance that your interest payments won’t go up or down during the fixed term – however you may be forced to incur ‘lock-in-costs’ which range from $500 – $750 per application on average.
Most lenders strictly limit extra repayments you can make on fixed loans. Some don’t allow any extra repayments, while others will allow extra repayments up to a certain limit, generally $10,000 or $15,000 a year.
Repaying a fixed loan early will generally incur ‘break costs’, which covers the lender’s loss on the forecast interest and can often amount to thousands of dollars.
Check offset option
Unlike variable loans fixed loans generally do not offer offset facilities, which allow you to cut interest costs substantially by allowing the balance in your offset account to offset your home-loan balance, thereby cutting interest charges.
A split mortgage lets you fix a portion of your loan, and leave the remainder on a variable rate, providing you with some protection against interest rate rises whilst retaining some of the additional features variable loans offer as mentioned.
If you’re in the market for a mortgage or are looking to refinance an existing one, get in touch with one of our ChapterTwo representatives for a free consultation.