October 07, 2014
Peter Hale from Mortgage Choice in Mount Lawley explores weather low fixed interest rates could be the deal of the century or just another way the bank is trying to lure you in.
You might’ve noticed something lately.
The banks are shouting it from the rooftops and using every advertising method known to man to make sure you know that fixed interest rates are low.
Recently there has been a ‘rate war’ going on between the big four banks in relation to their fixed interest rates, and it’s getting plenty of attention from Perth home owners.
For some people this could be a great opportunity to secure some certainty around their home loan repayments for the near future.
For others locking in a fixed rate could be the equivalent of financial jail.
At Mortgage Choice Mount Lawley we know it’s determining the difference between the two that enables you to make sure you don’t end up choosing the wrong option.
However, determining which option is right for you means looking past the flashy advertising and headline rates. We need to delve into what your financial goals are and why you are looking for a home loan in the first place.
Why the bank wants to get you into a fixed rate
The question we hear most at Mortgage Choice Mount Lawley is;
Why are the fixed rates so low? Why would you choose to fix your rate? & Why are the fixed rates changing when the Reserve Bank hasn’t reduced official interest rates for over a year?
These answers go along way to understanding weather or not a fixed rate is right for you, and to get to the bottom of these questions you first need to know why the banks want you to fix your home loan.
Basically the banks are lowering fixed interest rates in a bid to secure your business for the long term.
Generally when you borrow from the bank on a variable rate, you can refinance that loan at any time and pay minimal fees to switch banks.
This is great for you, but not for the bank.
The bank is relying on your repayments over the longer term to secure their profits and keep the share price ticking along. So when you refinance a variable rate home loan not only do they lose out on future repayments, but they can’t sting you with huge break costs, other than the regular discharge costs.
A fixed home loan contract is different.
If you decide to fix your interest rate for, say, 5 years, this is a whole different ball game.
It becomes a fixed contract between you and the bank, whereby you will repay a set amount back over the next 2, 4 or 5 years, and in return the bank will give you a rate discount.
At the moment anyway.
However, if you break this fixed contract by selling your house or refinancing and paying out the loan, the bank can charge you for the interest, or profit, they have missed out on for the fixed period.
Keep in mind that this only applies to the initial fixed rate term and not the whole loan term. Although you may have your rate fixed for 3 years, once this period is over you can refinance without having to pay break fees.
Think about your future
When I talk to our Mount Lawley mortgage customers about fixed interest loans the main thing to determine is where you expect to be in 3,4, or even 5 years time.
If I’m talking to a young first home buyer, who plans to buy a house and is just starting to gain some momentum in their career, one of the options I might consider is looking at a fixed term of 2-3 years max.
The reasons behind this is that they will most likely have an increasing wage in the near future and the current house might not suit their needs in 3-4 years time.
Oh, and did I mention that most fixed home loans either have a cap on extra home loan repayments or won’t let you make any at all?
If I am speaking with a young family who are looking to buy a new family home for the long term, then a 5 year fixed loan might make perfect sense as they are more likely to find that home suits them for at least the next five years.
Make sure it suits your needs, not the bank’s
If you are considering a fixed interest home loan then just make sure that you know what your plans are for the amount of time you are thinking of fixing. You need to assess where you are at in life and think about any future events that might affect your ability to see out the fixed loan contract.
With literally hundreds of fixed rate products on the market from our panel of up to 27 different lenders, Peter Hale from Mortgage Choice in Mount Lawley can help you to determine which one will suit your particular situation.