Fixing your Home Loan

home loan interest rates risingAre you worried about the increases in home loan mortgage rates? Are you considering switching to a fixed mortgage?

Given the recent trend of home loan interest rate rises, many home owners may be considering switching to a fixed rate home loan. Home owners are facing a similar situation as they did approaching the Federal elections in 2007. At that time the mortgage rates increased rapidly and many opted to switch to a fixed rate loan only to see the RBA rapidly cut rates due to the global financial crisis. Many borrowers who did fix were left with monthly repayments substantially higher than variable rate repayments. Now the RBA is trying to fight inflation, house pricing bubbles and bring rates up from historically low rates so interest rates are on the rise.

Home Loan Standard Variable Rates vs 3 Year Fixed Rates

Variable vs Fixed Rate Home Loans

Source: RBA

This graph shows the average standard variable home loan interest rate and average 3 year fixed home loan interest rate from 1990. The movement of both these rates closely track the cash rate which is determined by the RBA. Sometimes the variable rate leads the change in direction and sometimes the reverse is true. Picking where rates will be in the future is impossible but it gives you a good idea of how fast rates can change.

The big issue is that fixing your mortgage is a gamble. It’s a massive gamble on the direction of variable interest rates. You need to consider why you are doing it and what are the possible outcomes if you do. Put simply you can either win or lose but depending on your circumstances it is not always cut and dried.

Why Switch to a Fixed Rate Mortgage

Fixing your interest rate gives you the knowledge that you repayments won’t change for the period they are fixed. If your repayments are a large part of your income then this could give you peace of mind. Sure you could lose out by paying more than you might have needed to but you can rest assured you will still own your home at the end of that period (assuming other variables don’t change). If making the monthly repayments is a worry and a 2% to 3% or even 5% increase in rates will see you lose your home then this might be something to consider.

Downside to Fixing to a Fixed Rate Mortgage

  • Miss out on lower interest rates
  • Break fees if you switch out
  • New loan fees

Alternatives Options to Fixing your Home Loan

Consider a no frills basic home loan. No frills basic home loans typically are around half a percent lower than standard variable rate home loans. They don’t always have the extra features of the standard variable rate loans but you should consider if the extra features are really needed. There are many no frills basic home loans that have redraw and offset accounts which will suit many borrowers.

Fix a portion of your loan. You can take an each way bet by fixing part of your home loan.

Fees to consider

Termination Fees – Most banks will charge you a fee for terminating a home loan within a certain time period commonly 5 years. In most cases this is payable even if you are switching to a new loan with the same lender.

Break Fees – Most mortgage lenders have what are called break fees. If you are changing from a fixed interest loan where the interest rate is higher than the variable rate then depending upon the size of the loan then this can easily run into tens of thousands of dollars. When the interest rate of the fixed loan is below the variable loan then you may not have to pay a break fee. In the first example the lender is losing money in the second they are making money hence the difference. You will need to do a cost benefit analysis to work out whether it is a good idea to switch. Weigh up the break fees and other costs versus the interest savings on your monthly repayments over the time period left on your fixed loan.

You also need to factor in the costs of the new loan. This is not a comprehensive list of issues to consider and it is a complex issue best dealt with by professionals. Please take advice from your financial adviser before taking any action.

For help choosing a suitable loan you might consider using a Mortgage Broker. Most mortgage brokers will be able to find out what your needs are with respect to features and then find the best one from a large panel of lenders.

Disclaimer: Switching loans is a complex issue. You should always take advice from a professional before undertaking any action as it may lead to large financial losses.