December 05, 2016
Home loan interest rates are at all-time lows.
And it’s not just variable rates that are sitting at low levels. Today, most lenders are offering incredibly sharp fixed rate pricing.
If you are looking for some certainty around your home loan repayments, then a fixed rate home loan (or a split rate mortgage) may be the ideal solution for you.
As the name would suggest, a fixed rate home loan is a mortgage that boasts the same fixed interest rate for the duration of your preferred fixed period.
One pitfall associated with a fixed rate mortgage is the break costs. There are couple of ways you can be charged break costs, namely:
1. If you switch to a different product and/or lender before your fixed rate home loan term has expired;
2. You make additional home loan repayments in excess of the amount stipulated by your lender;
3. You repay your loan in full before the fixed rate term has expired;
4. You default on your mortgage repayments.
Depending on the size of your fixed rate mortgage and how much time you have left in your fixed rate loan term, break costs can be very expensive.
Lenders will typically finance your home loan on the wholesale market with a fixed maturity date.
At the time you switch loans or repay your loan early, your lender will use the Bank Bill Swap Rate (BBSR or BBSW) to calculate your early repayment cost.
As such, break costs will vary from borrower to borrower and lender to lender, depending on their unique set of circumstances.
For this reason, it’s important to consult your lender before you decide to break out of your fixed rate home loan.
If you are currently in a fixed rate product and would like to break free from the mortgage, your local broker can help you identify exactly how much your individual break costs might be.