Right now, you’ll find plenty of news items telling us that a fixed rate home loan is a good idea. It’s true – if you have ever considered this, there will never be a better time. If you haven’t, it’s worth thinking about.
The Big Four knows this, and they’re all after your business.
They’ve jumped on the bandwagon and lowered their fixed rates to below the magic 5% mark. This is a possible once-in-a-lifetime opportunity to have a stable monthly payment before rates begin to rise again (as they inevitably will).
Once the first of the Big Four banks lowered their five year fixed loan to below 5%, it was only a matter of hours before the other three started to follow. However, most other lenders have done the same and so the options may overwhelm you.
What is a fixed rate loan?
It is an agreement between the bank and the borrower that the borrower will be protected from rising interest rates for the period of the fixed rate. Most have a time limit – 3, 4 and 5 years are popular.
The devil is in the detail
A guaranteed monthly payment makes it easier to plan cashflow; but there are disadvantages.
Before you commit, make sure you know exactly what a fixed rate mortgage involves. Although many banks are becoming more flexible with these types of loans, some may include:
- Not being able to pay down your mortgage – some banks won’t allow any extra payments during the period of your fix rate while others limit the amount you can repay
- You most likely won’t be able exit your loan during this period without a costly payout
- Some don’t offer redraw facilities
There is also the chance over the term of your loan that variable interest rates may actually be cut, but that’s part of the deal when you sign.
A popular choice is to fix a certain amount of your mortgage – say, 50% and leave the other 50% variable. This ‘hedging your bets’ option allows you to take advantage of the benefits of both types – a more stable monthly payment and the ability to take advantage of all of the benefits of a variable home loan.
What’s your choice?
Ultimately, you’ll need to decide if a fixed rate home loan suits your needs now and take into account the next 3-5 years. Write down the pluses and minuses, and then make sure you compare all of the options that are currently on the market. Finally, have your mortgage broker go over all the pros and cons for you.