Find out your options for fixed-rate loans in the Australian property market
When you look into getting a home loan in Australia, you are generally offered one of three options:
A fixed-rate loan is where your interest rate is locked for a set period of time, generally from 1-5 years. This means, unlike with a variable-rate loan, your repayments will stay the same for that set period, no matter what happens with interest rates in the market.
Choosing the right loan is a great start but what is the point if you lock yourself in when rates are high, only to see the Reserve Bank cut interest rates?
By fixing when the economy is running smoothly and interest rates are cheap, you will protect yourself from credit crises and volatility.
Unfortunately, most Australians fix when rates are high because they fear that rates are going to go higher. Remember, three to five years is a very long time, so take time to make your final decision on the type of interest rate you want to go forward with.
Many people just go straight to their bank and try their best to negotiate a good rate. Unfortunately, this strategy is flawed because, unlike variable rates, the major banks and other lenders have completely different fixed rates.
Why is there so much variation? Because each lender has their own opinion about the likely direction of interest rates in the future and so they price their loans with different rates.
A mortgage broker can negotiate on your behalf to get a great offer from one of the lenders on their panel.
Of those who apply for a fixed-rate loan, many of them would be better off with a variable rate.
Why is it that some people are better off with variable rates?
A fixed loan is like a fixed contract: if you break it then it is going to cost you a small fortune.
Do not fix your interest rate if you plan to:
Tip: Flexible fixed rates (splitting the loan so it is half fixed and half variable) may help if you are planning to make extra repayments but this will not help if you are selling or refinancing, as you would still incur large exit fees.
Suppose you apply for a fixed-rate home loan and the bank changes its fixed rates between the time that you apply for the mortgage and the time that your loan is advanced, then you will get the new fixed rate. If you want to make sure you get the rate that was initially offered to you, you can pay a fee that ranges from $395 to $695 or 0.15% of the loan amount to lock in your rate at the time of application. This is called rate lock and the fee charged is called a rate-lock fee.
A break cost is a fee charged by a lender when a borrower repays their fixed-rate home loan early or breaks their fixed-rate period.
The break cost is designed to compensate the lender for loss of interest, and can sometimes be quite high. You can use our break cost calculator to get an estimate of what you may be charged if you pay off your home loan early.
You may notice that the media is constantly reporting that interest rates are either going to shoot into the stratosphere or plummet down to record lows. They regularly ask economists to make predictions on interest rates because these articles grab the attention of most Australians.
The truth is that nobody knows what will happen with interest rates in the future, not even the Reserve Bank.
In the past, we have seen many predictions on interest rates that have turned out to be incorrect.
If you choose to fix your interest rate, then please base your decision on sound economic logic or on your own personal preferences, not media reports. Read only the official predictions released by the big four banks or government sites.
Always keep in mind that if you fix your home loan and then interest rates drop, you cannot switch back to a variable rate without paying a large exit fee.
Traditionally, fixed-rate loans lack the flexibility other home loan products offer. However, with new products coming out in the market, some fixed-rate loans now offer features including:
Want to get some great tax deductions this financial year? Pre-pay your interest by signing up for an interest-in-advance home loan. We know lenders that have the most competitive interest rates and can offer you professional discounts as well.
This option is particularly suitable for property investors and those refinancing.
Our mortgage brokers have specialised software that can quickly find and compare the cheapest fixed-rate home loans.
Please call us on 1800 771 900 or enquire online and we will complete a needs analysis, work out which lenders you qualify with and give you several options to choose from.