Home Loans 18/11/2020

Fixed Rate Home Loans

Fixed rate home loans are looking very appealing lately considering they are going as low 2.09%. Fixed rate home loans are not only very appealing at the moment but also tend to be lower than a variety of different rates in the current market.

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What is a fixed home loan rate?

There are two rate types for Australian home loans, those being fixed and variable rates. The name essentially answers what it does. Fixed rates won’t change in the middle of a fixed period (around one to five years). Variable rates on the other hand are able to rise/fall at the discretion of the lender.

Yet it’s more than it seems. Here’s what you need to know about fixed home loan rates:

  • You’ll often find that fixed interest rates are normally higher than variable rates, however this is ultimately determined by the loan and lender (and currently, most lenders have lower fixed rates than variable rates).
  • Because the rate is fixed, you don’t have a lot of moving room in regards to the rate. So, you could be unable to make additional repayments as well as higher expenses due to leaving the mortgage (in order to refinance). Ensure you’ve read the fine print of your mortgage contract.
  • A variable rate could be a better alternative if you’re looking for an offset account with your loan. You’d struggle to find fixed rate loans that have offset accounts.

When the fixed period on my interest rate finishes, what happens then?

We’d advise you to check out the revert rate. Simply put, it is a variable interest rate that your fixed loan changes over to after the fixed period.

It could potentially be bigger than the current fixed rate you’re on, however it could also end up being lower too. It all comes down to who your lender is, what is the product and the position of rates within the market at that specific time period. Although, if the revert rate is seemingly higher, you can refinance your loan towards a smaller variable rate or you can just ask your lender for a discounted price.

 

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How can I compare and contrast fixed rate loans?

To find the best fixed rate product for you, check out the following:

  • Low interest rates. Lower is always better for home loan interest rates. It will help you save money. When people sign on for fixed rates, the expectation is to sign on now while the rate is low to hopefully avoid and be protected from rising rates in the future. We’d still recommend looking into variable rates though and assessing which out of the two is more suitable for your situation.
  • Revert rates. If made public by your lender, make sure to check out the revert rate. Simply put, it is the variable rate your fixed loan changes over to after the corresponding fixed period. There are loans with higher revert rates than others. So, make sure you’re aware of the revert rate you’re considering, because it could’ve changed by the time your fixed period had ended. Besides, it’s common knowledge to assess what rates are currently at when the fixed period is over so you can refinance if need be.
  • Lower fees. Be aware of annual or ongoing fees from a loan. If you’re not careful they can really hurt you financially in the long run.
  • The fixed length. If you’re a fixed rate borrower, you have to select from a range of one to five-year fixed rates. You’ll find that the majority of loans will give you multiple options, with differing rates for each one. The shorter fixed rates tend to be lower, thus, one-year fixed rates will have a lot more competition than the five-year fixed rates.

Is fixing my rate a good idea?

The majority of Australians tend to lean towards variable rate loans. Probably because they are generally more flexible in terms of their products and interest rates.

However, there are a few reasons to fix your rates, especially in the present day where fixed rates are cheaper than they’ve ever been. Have a look at some of the pros and cons of fixing rates.

The pros of fixing

The best thing about a fixed rate is that any repayments you have won’t change over time. This’ll give you a peace of mind and reassurance concerning your repayments. You’ll be able to budget efficiently and ignore rate changes until the fixed period is finished.

If circumstances change and variable interest rates are on the rise, you might find yourself with a rate that’s even better than the average. Yet, rate changes are seemingly unpredictable.

The cons of fixing

There’re a few reasons why Australians choose variable rate over fixed interest rates:

  • Limited features. Fixed rate loans aren’t as flexible as variable rate mortgages. So, the majority of lender won’t offer you a fixed home loan with 100% offset accounts.
  • Break costs. If you decide you want to end your fixed rate loan before the agreed upon fixed period is up, you could end up facing a break cost. It’ll cost you anywhere from a couple hundred dollars to possibly thousands of dollars.
  • Rates might drop. If the cash rate is slashed by the RBA you might find yourself with a larger rate in comparison to variable home loans.

Are fixed rates more affordable?

The main thing you need to know is that fixed rate loans are about balancing an affordable rate with the assurance that your repayments will be sorted. If you like the rate you have and aren’t necessarily planning on refinancing anytime soon, maybe fixing your rates could be a better alternative for you. You just have to accept the fact that if you’re on a variable rate and it increases, you might have to wait before you can refinance, and make use of the next lower rate.

During the second half of 2019 surprisingly, fixed rates were equal to variable rates. But, today they’re slightly more affordable or equal to those same variable rates. Although this is quite rare, it can happen sometimes.

If I’ve paid my break costs, will fixing be cheaper?

If you’ve decided that you want to break your fixed rate loan in order to refinance towards a lower rate, we’d recommend being careful as that option can be quite costly. However, if your repayments end up being a lot lower, then you could technically find yourself saving more money long-term.

For example. Hypothetically, let’s say you are on a 3-year fixed rate loan with 1 year remaining on your fixed period. You fixed your rate to 3.90% and have a remaining $400,000 on your loan. The loan term itself is set at 30 years. Due to the current market, fixed rates are lower and your lender is willing to offer new borrowers a fixed rate of 3.30%.

Therefore, you can now take this 3.30% to calculate an estimate of your breaking costs (if you decide to). You can find this by calculating the difference between both your rate and the new one (3.90 and 3.30) which will give you the more complex difference in funding costs. The equation for basic break fee costs is as follows:

  • Loan amount ($400,000) xfixed period remaining (1 year) x rate difference % (3.90- 3.30 = 0.60%) = $2,400

Remember though, this is only an estimate as most lenders will have their own techniques to calculating break costs.

Within the first year following the switch, you would’ve saved up to $2000 even though you’ve paid the break cost also. And for corresponding years you’d end up saving more and more.

The split rate alternative

If you’re still undecided about going with variable or fixed rates, most lenders will let you split your loan into variable and fixed portions. What this does is essentially allow you to hedge your bets. Figuring out what the best split variable-fixed option for you can be confusing, so ask a lender or mortgage broker to help you out with it.

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