Are you purchasing or looking at refinancing and thinking about a fixed rate mortgage? Interest Rates are the highest they’ve been in years and we’ve had several rate rises in the last 8 months!! You can watch the news, read the papers, or see your financial advisor but the reality is that nobody really knows what is going to happen in the short term. Whatever you hear is just somebody else’s opinion!! So when will it end and is it the right time to consider fixing your loan??

always make sure you can make additional repayments with your loan product

It is nerve-wracking with continual rate increases!!

However, fixing your interest rate now could cost you more in the long term! Interest rates move in cycles and fixing at the wrong period in the cycle can see you paying more than if you had left it as variable. You see, fixing your loan for 2, 3, or 5 years is a long time and a lot can happen in that time! The common question you always hear is “Has the horse already bolted?” and when it comes to fixing your loan you would have to say YES it has!! Realistically fixing your loan a year or two ago would have been the answer but hindsight is a wonderful thing!! So fixing now at a high rate will cost you if and when rates begin to stabilize and even decrease again.

Banks love you fixing your loan do you want to know why??

In general, fixed rates already have several rate rises built into them. You are paying for stability or less risk!! You are already paying a higher interest rate and secondly there is no flexibility with making extra payments. Banks make their money by keeping you on the books as long as they can and would rather you pay the highest interest rate possible and you are doing this with a fixed rate with no flexibilty to further reduce your balance!! Not to mention the fees they will charge if you wish to change lender! Who wants to be locked into a rate at the peak without having the ability to make additional payments??

A combination of both fixed and variable is a good solution

In recent times of unstability, you may be 100% correct in fixing your whole loan or you may be 100% wrong if rates begin to fall. Why not have a combination of both and at least be 50% right?? A lot of products let you fix a portion of your loan amount while the rest can remain as variable. The advantage of this is you can make additional payments to the variable portion as you need to, while you also have the stability of your fixed portion!

Be smart and don’t panic!!

As I’ve stated in previous posts, I believe in reducing your mortgage as soon as you can, and you can still do this with a combination of both fixed and variable rates. With only a fixed rate, you cannot make additional payments and if rates do level off or fall you are stuck paying a higher rate!! Reducing your risk is the goal and in volatile times it may pay to spread the risk by splitting your loan into both fixed and variable rates!

Ok so this post isn’t going to be too entertaining but it’s important to get the basics listed so they can be referenced at any time. Let’s start with a brief description of the generic Mortgage Products that all the institutions offer.

Standard Variable Rate

Probably the most popular type of home loan in Australia. Being variable, the interest varies up and down throughout the life of the loan.

Basic Variable Rate

A lot of lenders offer the Basic Variable with a lower interest rate compared to the standard variable but with fewer features. Again, the interest rate varies up and down throughout the life of the loan.

Fixed Rate

Interest rate and loan repayments are fixed for a set period, between one and 5 years. Most fixed loans automatically convert into a variable loan at the end of the fixed rate period. Additional repayments cannot be made with a Fixed Rate loan.

100% Offset

A little tricky to understand Offset loans have a savings account linked to the mortgage loan. The purpose of savings account is so that the balance of funds in the savings account is 100% offset against the interest being charged to the loan account. So, instead of interesting being charged on the balance of the home loan, it gets charged on the balance minus the funds in the savings account.

All-in-one

Works a lot like the 100% Offset but instead of having a savings account in conjunction with the loan account, any income and additional savings go straight into the loan account therefore interest is being charged daily on the lower balance. Funds required for everyday use can then be withdrawn from the loan account as needed.

Low Doc

For those that are self-employed and don’t have time to provide two years of financials (most banks require 2 years), applicants can provide a signed declaration of their income and servicing is based on this. There are usually LVR restrictions with these products
Line of Credit
Almost like a large credit card facility secured over your residential security. Applicants can then draw down to a set credit limit as required. Lines of Credit are popular with investors and are usually interest only. If you’re not a good money manager then a Line of Credit is not for you!

Other Loan Types & Terminology:

Non-conforming Mortgages

For those applicants that may have adverse credit issues eg. Defaults, judgments etc. or past repayment issues eg. Dishonours or reversals on their home loan, short-term employment, savings from an unusual source or other unique criteria, then there are lenders who specialize in this department and are called non-confirming lenders.

Combination home loans

Simply having a combination of both a variable and a fixed portion. Eg. Having 2 separate loans splits secured against your security