Fixed rate home loans ? Worth another look

August 10, 2014
Leteisha Pileggi

Cannington Mortgage Choice broker Leteisha Pileggi explains why today?s fixed rate home loans tick plenty of boxes. 

 

What amazing times we live in! In early August the Reserve Bank Board elected to keep interest rates on hold for another month – the 12th consecutive month of record low rates. Yet just weeks ago several of Australia’s largest lenders slashed their fixed home loan rates, with three of the four big banks currently offering 5-year fixed rate home loans of just 4.99%, which is largely unheard of.

These compelling rates are set against the backdrop of a healthy property market. Figures from RP Data[1] show that over the last 12 months house values in Cannington, where I am based, have risen by 9.8%, and prices are up 25.0% over the past five years. That’s outstanding growth and it proves that property is still incredibly attractive to Perth residents and Australians more broadly.

 

Fixed rate – great value, more flexibility

The buoyancy of today’s property market coupled with historically low interest rates makes it worth considering a fixed rate home loan.

Fixing acts as a hedge against possible future rate rises, and borrowers looking for a wealth of loan features can take heart knowing that today’s fixed rate home loans are more flexible than ever before.

Many fixed rate home loans permit fee-free extra repayments, and while annual limits may apply, these tend to be well within the budgets of most borrowers – often in the order of $10,000 extra per year.

A growing number of fixed rate home loans are also starting to offer features once reserved for variable rate loans – like redraw and even offset accounts.

 

Align a fixed rate term to personal plans

Nonetheless to decision to lock into a fixed rate home loan calls for careful thought. No one can predict with absolute accuracy how interest rates will move in the future. So using fixing your home loan rate does involve something of a gamble.

In practical terms, with home loan rates currently sitting at 50-year lows, there is plenty of scope for rates to go up and not a great deal of room for them to fall further. Nonetheless, borrowers concerned about pinning their plans on a fixed rate can take an each-way bet by splitting their home loan across fixed and variable rate components.

 

Planning helps to avoid break costs

In many cases, a more noteworthy downside of fixed rate home loans is the prospect of facing break costs. These can apply if a home owner bails out of a fixed rate loan before the fixed term expires.  Taking a few simple steps can help to avoid this pitfall.

The first is to align the chosen fixed term with personal plans. Borrowers who are considering upgrading a to a larger home in, say, two years would be well advised to steer clear of a 3-year fixed rate term, and instead opt for a 2-year or 1-year fixed rate period.     

It also makes sense to stay in touch with your mortgage broker – especially if any opportunities arise, like a job transfer to another location that could throw the best laid plans into disarray. A good home loan broker can provide a clear picture of where you stand in these circumstances, and help you weigh up the different possibilities.

 

Be guided by your budget

Of course, the decision to fix should always be made with reference to personal budgets. For some home owners, the reality is that even a small rate rise could leave the household budget thinly stretched. Under these circumstances, the peace of mind that locking in a fixed rate brings can outweigh the possibility of paying slightly above the odds further down the track – and indeed, it may never be an issue at all.

 

To learn more about today’s low fixed rates, and to discover if fixing is right for you,  call Leteisha Pileggi at Mortgage Choice Cannington on 0423 297 293 or 08 9355 1099. Or call into our office at 1/1393 Albany Hwy, CANNINGTON WA 6107.

 

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[1] RP Data Suburb ScoreCard, Corporate Edition. Data Set April 14 published July 14

Posted in: Interest rates

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