What to know before switching to a fixed rate mortgage
Interest rates are at record highs. And while this is bad news for your savings account, it is good news if you have a home loan.
A question you may be asking yourself is whether to lock in your repayments by switching to a fixed rate mortgage.
There are pros and cons, so here are some important things to consider before making your decision.
Fixed rate loans can help you if your budget is tight
There are two key benefits to fixing your mortgage rate:
- 1.You know exactly how much your repayments will be over the fixed period;
- 2.If interest rates increase during the fixed period, your mortgage rate will not increase.
Nick Georgiou is a financial advisor working with the National Debt Helpline.
He says the predictability of fixed rate mortgages can be especially helpful for first-time homebuyers and people on tight budgets.
“Knowing that your bi-monthly or monthly repayments will be the same can make budgeting a lot easier,” he says.
If you change your mind, you will have to pay a break fee
If you have to give up a fixed rate loan, you will likely have to pay a breakage fee. And they can be important.
Depending on your loan amount, interest rate fluctuations, and the length of your loan, these fees can easily run into the thousands of dollars.
“If there is a clue that you may consider moving or want to change your loan, keep it variable because you don’t want to pay these fees unless you absolutely have to,” says Adrian Willenberg, a Melbourne based mortgage broker.
Fixed rate loans often have limits on additional repayments
Most fixed rate home loans limit your ability to make additional payments.
Typically, loans will allow a certain amount of additional repayments each year or over the life of the loan. Once this limit is exceeded, additional refunds incur charges.
If you’re concerned about repayment limits, but still want more certainty about your repayments, one option is to split your loan.
“Let’s say someone borrows $ 500,000. They could choose to put $ 350,000 in a fixed rate loan and leave $ 150,000 variable,” Willenberg said.
“That way, they can continue to make additional repayments on that part of the variable loan.”
If interest rates drop, you may end up paying more
The big risk with setting your interest rate is that interest rates may continue to fall, leaving you to pay more interest than you would otherwise.
Mr Georgiou says interest rates are almost impossible to predict, so it’s best to decide based on your individual financial situation.
“Or you don’t, and you decide you want the flexibility of a variable rate.
“The decision should be based on this rather than an attempt to try to outsmart a whole market of very savvy investors, who have typically invested billions of dollars.”
Fixed rate loans often have limited features
If you like to use your clearing account or your withdrawal facility, keep in mind that these features are less common with fixed rate loans.
Sometimes these will be available for an additional fee, in which case you really have to weigh the benefits against the costs.
Before changing, consult a range of lenders
If you think you’d like to change, it’s important to do your research.
Here are some helpful tips from Mr. Georgiou.
- 1.Research rates available from lenders;
- 2.There are websites that bundle home loan products and they can be helpful. Keep in mind that these sites may collect your data and may not list all options;
- 3.Use a mortgage calculator to see how the change will affect your refunds.
Some people prefer to use a mortgage broker to help them compare and apply for products, but you can also do this yourself.
If you decide to use a broker, it is always useful to come armed with some knowledge on products that might interest you.
If you’re having trouble repaying your home loan, there are options available to you
If your budget is tight or you are having financial difficulties, support is available.
Financial advisors like Mr. Georgiou can’t help you decide whether or not to repair your home loan, but they can help you get a better idea of your financial situation and budget.
This article contains general information only. You should consider obtaining independent professional advice based on your particular situation.
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