Is it time to fix your mortgage interest rate?

Is it time to fix your mortgage interest rate?

If you have a mortgage, the current historically low interest rates have no doubt been a welcome relief.

Australia’s official cash rate, as set by the Reserve Bank of Australia, has been sitting at 2.5 percent for the past nine months and economists such as Westpac’s Bill Evans are saying it’s unlikely to go down further. According to Evans, the cash rate has reached its lowest point and will begin rising in the second half of 2015.

So is now the time to fix your mortgage interest rate?

If you would like some certainty in your mortgage repayments, then a fixed interest rate may be for you – it’s easier to budget when you have a fixed rate loan as the repayments won’t change during the fixed period. The problem is that fixed rates have already gone up.

“One year ago, fixed interest rates were below the variable rates,” said Paul Cooke, senior adviser with Parker Financial Services.

“Fixed rates are now all above the current variable rates.”

Nevertheless, you won’t get a better deal on a fixed rate if you hold out any longer.

“Fixed rates won’t go down any further,” Cooke added.

Switching to a fixed rate now means your repayments will initially be higher than if you remain on a variable rate, but you will be in a better position once rates rise in the next 12 months.

“It’s getting to the stage now where it’s worth suffering a little bit of pain now because once rates start to jack up, they will go up fast,” Cooke said.

You can only fix home loan interest rates for a set period – usually a minimum of one year and a maximum of five years. Alternatively, you can hedge your bets by fixing the interest rate on a portion of your mortgage while leaving the remainder on a variable rate.

“I suggest to some of my clients to fix 25 percent or 50 percent of their mortgage,” Cooke said.

“That way if interest rates do stay low, you are getting some advantage of the low variable rate while being prepared for the eventual rise.”

Cooke advised that to get the full benefit of a fixed rate, you should be considering a three-year or five-year term. When interest rates begin to rise as expected in approximately 12 months, you will gain at least two or four years on a better rate.

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Learn more about home loans

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.

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.

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.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

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.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.