Low Interest rates have been in place for a long time and more Aussies are looking to fix their home loans, unsure of exactly when a rate rise might come along and add to their monthly repayments.
Experts are divided on where rates will go next, with some economists calling for another reduction from the RBA, while others are convinced it’s time to start bringing them back up.
At any rate, history shows that variable rate loans average above 7 per cent and this suggests the current availability of mortgage products at lower than 5 per cent won’t last.
Therefore, casting aside the possibility that rates might be slightly lowered one or two more times, you are not likely to find a better time than now if you think fixing is the right strategy for you.
And whether it’s right for you is a more important question to establish than what the future movements of rates might be. To understand how it works, a fixed loan means you’ll make the same repayments for the term you choose and avoid surprise increases.
Most lenders in Australia offer fixed rate products with terms of between one and five years. Some go as far as 10 or even 15 years, but with some terms and conditions attached.
The certainty around routine repayments suits types who like to make weekly or monthly budgets and know well in advance how much they will need to spend on all things to do with their house.
However, fixing can mean sacrificing some flexible features that variable rate loans offer, like making extra repayments to reduce your balance.
Lenders are being more flexible these days in a competitive market, but even the ones that allow additional payments to be made will usually limit the amount to around $10,000 a year or less.
This is no good if you suddenly come into an inheritance or pick the trifecta in the Melbourne cup and want to use the cash injection to pay off a big chunk of your mortgage.
You should also be sure that your situation won’t change significantly during the fixed term, because if you have to sell your property, or decide you want to refinance in this time, your bank is likely to slug you with heavy fees for breaking the fixed term agreement.
Exit fees on some new home loans were banned several years ago in order to stimulate competition, but fees can still apply for breaking fixed term loans during the agreed period.
Of course, the other potential downside is that rates might fall again for whatever reason and you have locked in a higher fee. However, at the moment they don’t have much further to fall. This concern would apply more to someone deciding whether to fix at 7 per cent or higher.
One available option is to split your loan and fix one portion, while paying variable rates on the rest. Make sure the larger portion is fixed; otherwise you can be locked in to an agreement, while still being exposed to variable rate movements.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au. Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing. His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.