Borrowers warm to fixed rates

Borrowers warm to fixed rates

Historically-low fixed interest rates have caught the attention of borrowers, who increased their demand for fixed rate mortgages this year.

RateCity data shows 22 percent of all its home loan applications in January, and 17 percent in February, were for fixed rate mortgages up from an average of 16 percent per month in 2012.

January applications through the site showed an almost 50 percent jump in uptake of fixed rates compared to January 2012.

Australian Bureau of Statistics data also shows a growing interest in fixed rates among borrowers, with 60 percent more fixed loans settled in 2012 than 2011. In fact, there were about 69,000 fixed rate home loans financed in 2012 according to ABS figures.

The average three-year fixed rate is 5.47 percent while the average variable rate is 5.89 percent. While average variable rates have previously been below 5.89 percent in the past, average three-year fixed rates have never been this low according to RateCity.

Michelle Hutchison, spokeswoman for RateCity, said home loan rates were available below 5 percent.

“Both three-year fixed and variable home loan rates start from as low as 4.99 percent,” she said.

And, she said, rates had continued to drop in recent weeks. “Several lenders cut fixed rates today by up to 30 basis points,” she said.

Variable rates also appeared to be on their way down, with several of out of cycle variable rate cuts made recently.

“It’s unusual to see more borrowers locking in a fixed rate while variable rates are falling because borrowers generally feel they will miss out on the savings of lower variable rates,” she said.

“Usually when variable rates fall there is less demand for fixed rates. RateCity looked at the past few rate cycles and all show a drop in popularity for fixed loans when variable rates fall.”

Yet some experts believe now is the perfect time to lock in at least part of your home loan rate.

Mitchell Watson, analyst at financial services researcher Canstar, said: “Even back when interest rates did bottom out in 2009, we didn’t see interest rates as low as below 5 percent.”

“There is no telling how low fixed interest rates will go but obviously they will have come to a point where they can’t go any lower,” he told News Ltd.

He said a split loan with a fixed and variable part is a good option for those unsure which way to go.

 

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What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

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What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

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e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

What is the amortisation period?

Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

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Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.