April 16, 2013
Mortgage Choice’s tips on the lesser known facts about fixed rate loans.
While fixed rate home loan demand hit a long-term high in March, Mortgage Choice encourages borrowers to carefully weigh-up the decision to lock in all or part of their loan.
The company’s loan data supports the industry trend of rising fixed rate loan demand, showing in March that this loan type reached 27.58% of all new loan approvals.
This was a 9.17 percentage point increase from February and represented the highest level of interest in fixed rate loans since March 2008. This is a national trend – with demand for the conservative loan type rising in each state. The greatest increase in fixed rate loan popularity was in Queensland, where demand rose by 13.89 percentage points to reach 36.94% in March from 23.05% in February.
Queenslanders continue to lead the preference for fixed rate loans, month on month. However, the biggest movement was in South Australia where demand for fixed rate loans rose by 14.1 percentage points to hit 32.26% in March.
At the same time, Victorians finally started to catch up to the rest of the country with the uptake of fixed rate loans rising 8.88 percentage points to 19.96%. This was followed closely by Western Australia where demand rose by 8.51 percentage points over the month to reach 24.25% and New South Wales, which saw only a marginal increase of 4.57 percentage points to hit 24.51%.
While fixing all or part of a loan may provide security and peace of mind in relation to repayments, borrowers should consider all the pros and cons of this loan type before locking in.
Apart from the often talked about ‘break fee’, which applies if you repay your loan in full or choose to switch loans during a fixed rate loan period, there are other factors to consider when choosing loan types.
One very important aspect of fixed rate loans is the time period when the interest rate is determined. Lenders may determine the interest rate when the loan is submitted or approved or when the loan settles.
Some lenders offer borrowers a rate lock, often at a fee, which enables them to secure an advertised fixed rate for up to three months before their new fixed rate loan is due to settle. However, if the fixed rate drops between the time you lock it in and when you go ahead with the loan, and you want to take advantage of the lower rate, then you must request to end the rate lock and may be required to pay another fee.
Another point to remember is that some fixed rate loans may not offer all the features available on variable rate loans such as offset, redraw, or the ability to make unlimited extra payments without penalty. There may also be limitations on fixed rate loans. For example, the limits of extra repayments allowed may vary as much as $0 to $500 per month or $5,000 to $10,000 per year, or unlimited extra payments. Exceeding the set limit on the fixed rate loan repayments may incur additional fees.
It is reassuring to know that locking in for a fixed term often encourages borrowers to think long-term about their loan repayment strategy.
Looking ahead and considering what you will do once the fixed rate period ends is important. Most fixed rate loans can either be re-fixed at the current fixed rates available, or they generally revert to the lender’s current standard variable rate or ongoing discount rate loan.
For all of these reasons, it is imperative to know exactly what your chosen lender’s fixed rate offer includes and to have a strong understanding of how you will cope when the fixed rate period ends.