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There has been much talk in the media lately about fixed rates – particularly the 5 year fixed rate offered by CBA of 4.99%* which many other major banks subsequently matched.
In an economy where changes in interest rates can never be reliably predicted, and where the major banks make changes independently of the RBA anyway, it can be tempting to commit to the seemingly low rates offered on fixed rate mortgages.
However, it’s really not as simple as locking in the lowest rate you can find. You should be aware of the significant limitations presented by a fixed rate mortgage.
Disadvantages of Fixed Rate Loans
- You are committing to one lender for a fixed period of time. Your ability to shop around for better rates and conditions are significantly restricted for the term of the fixed loan.
- Your ability to make extra repayments is eliminated or restricted, which could have major impact on the time it takes you to pay off the debt.
- While you’ll miss the financial burden of interest rate rises, you will also miss the advantages of interest rate decreases in the future. There is no way of predicting whether you’ll win more than lose.
Who Should Consider a Fixed Rate?
If you are susceptible to financial pressure brought about by changes in interest rates, then a fixed rate mortgage may be appropriate for you. If you are heavily mortgaged with very little room to move with cash flow whereby changes in interest rates could cause you to default on your loan, then the peace of mind and predictability of a fixed rate may be justified.
Choosing the Right Fixed Rate Loan
If you have determined that a fixed rate loan is right for your circumstances, then compare the loans being offered. For example:
- What happens if I want to sell my property during the fixed rate term?
- How much in extra repayments can I make?
- Can I redraw those extra repayments?
- How much will I be charged to secure this rate whilst I arrange the refinance of the loan?
There is great variation between lenders on the conditions of the loan, even when the fixed rate appears the same. For example, CBA only allows $10,000 per annum in extra repayments during the fixed rate term. In comparison there are other lenders that allow more in extra repayments, which would make a significant difference over the term.
Most Importantly
If you decide to ride the wave of interest rate changes with a variable loan, then ensure you are on a competitive variable rate with advantageous loan conditions. Give me a call on (02) 9908 9888 for a free ‘Loan Check’. I can compare your rates, term and conditions to hundreds of competitive products.
Patricia Williams is a credit representative (400458) of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237). *Warning: There has been no comparison rate applied to the example or examples given. Different amounts and terms will result in different Comparison Rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included but may influence the cost of the loan.