Fixed Rate Home Loans Is Now The Time?

If you are considering a fixed rate home loan but plan fixing to 'beat the bank' - i.e. to pay less interest than you would with discount variable be warned, it is very hard to do. Only around 20% of 'fixed rate loan' bets turn out to win in this sense. No-one can predict the future with any degree of accuracy, especially at a time like this (May 2009) and keep in mind that this time last year you would have jumped at a fixed rate of 6.99%.

A fixed rate mortgage is better thought of as insurance - insuring you against variable interest rates rising. You can expect to pay some premium ie: higher interest rates, for this privilege.

The time to fix the interest rate is the time when 'you' feel comfortable with the rate being offered. Keeping in mind they may fall a further 1 or 2 per cent - don't kick yourself for missing out on that, be happy in the knowledge that you are safe from any increases in the rest of the fixed term. Remember, fixed rates will rise quite sharply the moment the markets fear inflation, which could occur before variable rates reach their lowest point.

Fixed rates and serviceability

Fixed rate home loans give lenders and mortgage insurers greater comfort that you can service your loan. When assessing your borrowing capacity lenders add a margin of around 1.5% to the current standard rate to allow for some future increases. However if you are prepared to fix the interest rate for say 5 years they know your rates won't be rising any time soon and some lenders will assess your serviceability on this lower fixed rate. Not only that but some lenders will assess your serviceability on an 'interest only' basis. That could make a big difference if you're trying to borrow more and keep getting knocked back!

Fixed rate mortgages and flexibility

Time was when fixed rates crippled your flexibility. Extra repayments were strictly limited and redraws were unheard of, this is still true of most lenders. However now if you know where to look you can get great rates with previously unheard of flexibility - to make unlimited capital repayments against your loan or redraws against former repayments. We can even get you great fixed rates with multiple splits and multiple offset accounts.

Early Repayment Fees - Economic Cost - Break Fees on Fixed Rate Loans

In Australia almost all lenders recover the economic cost when you discharge, refinance, or make substantial repayments on a fixed rate loan. They can also apply if you are in default. How this fee is calculated varies and the calculation can be complex, however in general terms it is based on the lender's cost of funds (not the current standard variable rate) at the time you enter into the fixed rate period. This is then compared to the cost of funds at the time the break fee is calculated. If interest rates have increased it is unlikely there will be any economic cost, since the fixed rate will be lower than the current cost of funds rate. However if rates are falling the lender is losing out since they can only re-lend your funds at the current lower rate. They would argue that they borrowed at the higher rate and so are entitled to recover the difference that they would have made if you kept the loan for the fixed period.

The following chart shows an example of the economic cost in $ for every $1,000 to which the fee applies. So for example if cost of funds fall by 2% and you have $200,000 fixed for another 24 months - the break fee will be $8,000 - (this is an approximation). You can only find the actual figure by telephoning your lender and asking for a quote at today's date.

	Period in Months to Expiry
Rate Movement	6	12	24	36
1%	5	10	20	30
2%	10	20	40	60
3%	15	30	60	90
4%	20	40	80	120
5%	25	50	100	150

Finally a word on comparison rates

By regulation comparison rates are based on the life of the loan being 25 or 30 years. And while this is intended to provide you the borrower with a leveled playing field to compare products and lenders, it usually creates a distorted view when applied to fix rates. This is because at the end of the fixed rate period most loans revert to standard variable which at the moment is much higher than most fixed offerings. However the regulation comparison rate does not allow for the option of refixing, or switching or in fact refinancing at the end of the fixed period. Which is exactly what every borrower would do if confronted by today's standard variable rates. So to get a true comparison we suggest you do the comparison rate calculation based on the 3 or 5 years that you chose to fix.

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The observations made here are general and indicative. They are not warranted as free from error in any respect whatsoever. We are not financial or tax advisers and you should not rely on any aspect of these comments without taking independent financial advice relating to your own specific circumstances. We suggest you obtain advice on a fee for service basis rather than from someone who earns commissions from investments they recommend.

** Comparison rate based on a loan of $250,000 over 25 years. Note: Comparison rate regulations usually creates a distorted view when applied to fix rates. This is because at the end of the fixed rate period most loans revert to standard variable which at the moment is much higher than most fixed offerings. However the regulation comparison rate does not allow for the option of refixing, or switching or in fact refinancing at the end of the fixed period.
WARNING: This Comparison Rate applies only 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 in the comparison rate but may influence the cost of the loan. A Comparison Rate Schedule is available