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Homeowners rush to fix rates

Homeowners rush to fix rates

If you’re a homeowner, then the big ticket item on your budget will be your mortgage, and the choices you make about whether to fix your rate or ride the variable rollercoaster could mean thousands of dollars to your bottom line.

But how do you know when is the right time to fix?

Michelle Hutchison, spokeswoman for RateCity, said it’s a hard thing to predict the movements of rates, and for most people, the best strategy on average over a cycle of several years is to find the lowest variable rate possible and increase your repayments to as much as you can afford.

“But when fixed rates dip down to match, or even go below, variable rates, it’s worth thinking about fixing some portion of your loan,” she said.

“At the moment, three-year fixed rates are at their lowest level in three years. And in recent days, two of the major lenders have slashed fixed rates by as much as 50 basis points.”

The number of borrowers applying for fixed rate home loans has soared recently; 18 percent of all home loan enquiries at RateCity were for fixed rates in August, compared to just 5 percent in July.

Peter Switzer, founder of Switzer Financial Planning said now may be the time to fix when the rates are low. But he warns borrowers to beware, because you can lose redraw and offset facilities.

“I think when they are low that’s the best time for people to think about fixing. They still could lose out, the world economy could be depressed for three years and interest rates stay low. But we do know that banks have been very reluctant to pass on interest rate cuts, so they’ll be happy to raise them,” he told Today Tonight.

The major banks – ANZ, Commonwealth, nab and Westpac – offer packaged home loans with fixed rates at least 38 basis points below their standard variable rate. For a $300,000 home loan that’s a difference of at least $69 per month in the first three years.

RateCity’s Hutchison crunched the numbers on the best deals being offered, fixed and variable, and none were from the big four.

“Smaller lenders are much more competitive; you can save thousands of dollars per year by switching to a smaller bank,” she said, adding that borrowers should do their homework.

“Use a mortgage calculator to see the difference in monthly repayments and factor in your own estimates on rates rises – but always be sure to leave yourself a buffer. Make sure you can comfortably cover a rate rise of at least 1 percent, and preferably up to 2 percent, before diving into what will likely be the biggest financial decision most of us ever make.”

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Learn more about home loans

What is the difference between fixed, variable and split rates?

Fixed rate

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.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.