If you are a mortgage holder, you are probably keeping a close eye on Fixed Rate home loans and how these changes will effect your monthly budget.
A fixed interest rate home loan has a fixed interest rate period of 1 to 5 years. Before you change over to a fixed rate or review your home loan situation it is important to understand that there are certain rules and conditional associated with this type of loan.
The main items to consider are:
- Early Repayment Costs
If you want to pay back your home loan whilst the loan has the fixed rate, there could be early repayment fees charged to you. The fees are based on the time remaining on the fixed rate period, the loan amount, and the actual fixed interest rate. The exit fees cannot be advised until the day the pay out figure quote is requested. Therefore you must have a clear understanding of what your short-term goals are with your property. - Limits on Additional Repayments
Each lender has different rules on the additional repayments you can make during the fixed rate period. If you are wanting to make additional repayments during the fixed rate period then you must be aware of the lender rules and take these into consideration before making a decision. In addition to this you should also take into account that any surplus funds in a fixed rate home loan may not be able to be accessed like it can be with a variable rate home loan. - Rate Lock Fee
The fixed rate offered to you today may be subject to change. Therefore, when reviewing a fixed interest rate you must take into account the fee charged to guarantee the interest rate for a period of time. Each lender has different rules on how much they charge to take up the rate lock option. All lenders will give you the option to take up the rate lock or not. - Variable & Fixed Rate Home Loan Combo
It is possible to borrow with a variable rate and a fixed rate home loan and there are reasons for doing this which depend on your financial situation. When choosing this option it is important to consider what additional repayment capacity you may be able to pay and review the variable rate loan balance with this consideration. If you have a certain amount of money coming to you in the future, ensure that you will be able to utilise this money for your loan without incurring any penalties.
So what is the Fixed Rate at the moment?
Currently, lenders are pricing the fixed interest rates much higher than the variable rate home loan. We have seen a significant rate increase on fixed rate home loans with all lenders.
For example, a 3 year fixed rate home loan is sitting anywhere between 4% and 5%. If we were reviewing with one of the Big 4 Banks, we would be reviewing with the potential rate of 4.79%.
As it stands, variable interest rates are priced much lower than the fixed rate. A variable rate at the moment will be calculated at around 3% depending on the type of home loan, product and the lender.
With the current interest rate increases, is it time to switch to a fixed rate?
Things to consider are:
- Goals with the security property – are you going to be looking at selling or doing something to the property where you may have to borrow more money? You don’t want to be having to pay exit fees on the current loan if it is fixed.
- Additional Repayments – with the limits on additional repayments, be sure to review your ability to make additional repayments if this is what you want to do. You don’t want to be at your budget limit during the fixed rate period.
- Review the costing’s on variable interest rates vs the potential fixed rate. Review both repayments and see what the difference is and then think about whether you would like to have a lower repayment or a set repayment for a period of time.
Below is a repayment table so you can see the potential of home loan repayments over a 25 year loan term:
| Loan Amount | $500,000 | $500,000 |
| Interest Rate | 2.79% | 4.79% |
| Monthly Repayment | $2316 | $2862 |
| Difference Between Repayments | +$546 |
Knowledge Is Power:
What we have learnt over the past few years is that things can change quickly. Interest rates are on a upward trend and moving swiftly. There is nothing to say that if things change with the local economy or any regulatory change that the Reserve Bank Australia may have to reduce interest rates. If this is the case, you may find yourself locked into a higher fixed rate, which is one of the inherent risks of this type of product.
Be sure to think of your financial position when reviewing your home loan and the potential of current fixed rates and the risks associated with fixing your home loan.
Need more details?
If you need some assistance get in contact with a Launch Finance Broker so we can help you navigate through these changes and advise you of your best options moving into the future.
Contact (08) 9367 4222 or email [email protected] and our award-winning team can help you today.