Why NOT to lock your home loan rate
According to recent studies, one in four borrowers are now choosing a fixed-rated home loan. But if you think that by fixing your interest rate you’re saving money, you could be wrong. There is a lot more to consider than just the interest rate.
It could take years to "Get Ahead"
Those who choose to fix their rate generally pay around 0.4% above the standard variable rate for a 3 year fixed period. This means that until there are two 0.25% rate rises, you’re paying more interest. So, even when that second rate rise does eventuate, you’re still behind because you’ve been paying a higher interest rate for some time. How long it takes you to “get ahead” would depend on whether there are any subsequent rate rises. Given that that is a good possibility, you might think fixed rates are the best option.
Less features = less savings
But again, you could be wrong. There is even more to consider when you look at the features of fixed versus variable home loans. A 100% offset account allows variable rate borrowers to effectively live off funds which are stored in a separate home loan account. This can reduce the interest you pay on your loan significantly, and can also reduce your reliance on other bank accounts. For example, if your offset account includes an ATM card to withdraw funds directly from the offset account, you could do away with your everyday transaction account and be fee-free.
Less flexibility
Redraws and additional payments are other features which often are not included with a fixed rate home loan. If you can’t make additional payments to your fixed rate home loan then you’re sacrificing significant savings potential. Redraws are another feature which can be very convenient and can indirectly save you money by allowing you to temporarily deposit funds into the home loan account.
There is some good news
Fortunately for borrowers, fixed rate loans are becoming increasingly flexible, with some now offering features which were traditionally only available with a variable rate loan. Many fixed rate loans allow you to deposit additional repayments up to a certain amount, for example. But at the end of the day the only way to work out what’s best for your situation is to know your own financial habits and shop around accordingly.
Fixing your rate is always a bet, and if the market turns around and interest rates start to drop you could be worse off. The solution may be to split your loan with half fixed and half variable. Many lenders will let you do this, but be sure to investigate any fees you may be charged for doing so before you make the leap.
You can choose to split your loan with half variable and half fixed, or any other ratio. Perhaps you’d prefer the majority to be fixed, with only a small amount in a variable loan. Many lenders now offer this as an option. Of course if you do split your loan, you will not reap the full benefits of a variable offset account since the offset will only apply to the balance of the variable account. Do your research, and the savings could really add up.
How do I compare home loans?
RateCity.com.au is the best website to shop around on for all home loans, as well as most other financial products. At RateCity.com.au, you can use expert comparative data from CANSTAR CANNEX, Australia’s leading financial research and ratings firm. CANSTAR CANNEX has independently analysed and evaluated hundreds of financial products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important features so you can be confident you are getting the best product.
Use our easy search tools to compare credit cards at RateCity.com.au.
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