Is it the right time to lock in a fixed interest rate on your home loan?
The RBA lowered interest rates yesterday to a record 2.5% and this will no doubt send the banking world into a hyper competitive frenzy as each lender competes for market share.
Banks love it when borrowers lock in their debt because it means they are tied to them for a fixed period so fixed rate loans will hot bed of competition in the coming months.
When the banks promote their loan products the focus is almost entirely on the headline rate but you really need to look through these numbers and determine the right loan for you.
All the major banks have very competitive fixed rate loans at the moment with the three-year rates ranging from 4.99% to 5.19%. While it is great to have certainty over your interest payments you also need to consider the rate you pay once the fixed term ends.
In some cases the interest rate at the end of the loan term will revert to the standard variable. While other packages will provide with an ongoing discount of up to 1% off the standard variable for the life of the loan.
Although you will be in a position to renegotiate your loan at the end of the fixed term many people are busy and neglect this part of their strategy. It is not in the banks interest to let you know you are being ripped off so make sure you negotiate your discount before you lock in your loan.
One of the most competitive three year fixed rate loans at the moment has a headline interest rate of 4.82%. While this looks very enticing on the surface it does come with restrictions.
First you are only able to lock in 50% of the loan amount and the other half must stay variable. With this loan you may get some benefit from the lower fixed rate component but then lose this with a higher variable component.
Also the gearing on this loan offering is limited to 75% of the property value. For first homebuyers or borrowers with a small amount of equity this loan will not be suitable.
While locking in you debt will provide you with some level of comfort, paying off your debt should be the ultimate focus.
Some loans do not allow you to make any additional repayments over and above the interest repayments. This means you will be running on the spot and not paying off any principle during the fixed term period.
Many banks allow you to pay off some principle each year but this is usually capped at $5,000 to $10,000. However, at least you will be chipping away at the loan and reducing the amount of interest you pay.
Further no fixed rate loans allow you to harness the benefits of an offset account which reduces you loan amount on a daily basis depending on how much money you have in your day to day banking account. It maybe a better option to lock in part of your loan on a fixed rate and leave the other variable. This will allow you to use an offset account and make unlimited repayments.
Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.
