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Lower fixed-rate mortgages lure borrowers concerned about rising interest costs

Lower fixed-rate mortgages lure borrowers concerned about rising interest costs

A $1 million property borrower can save around $450 a month, or $5400 a year, by switching from the average standard variable into the lowest five-year fixed rate.

Lenders are falling over themselves with competitive fixed rates for borrowers with a chunky deposit of at least 20 per cent of the property value and a regular income that comfortably covers household expenses for the term of the loan. This is good timing for borrowers concerned about rising rates

Westpac is offering borrowers limited term discounts of between 30 and 50 basis points on fixed-rate principal-and-interest and interest-only loans of at least $150,000.

Lenders are cutting fixed-rate products despite being under increasing pressure to raise their standard variable. 

AMP Bank, a division of the financial conglomerate, continues to offer a competitive 3.79 per cent three-year fixed rate for owner-occupied principal-and-interest borrowers but has raised variable rates by up to 17 basis points. 

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“Borrowers often wait too long before making a decision to switch to fixed,” says Steve Mickenbecker, Canstar group executive at Canstar, which monitors rates and fees of financial products.

It’s worth shopping around because many of the best rates are offered by smaller banks, co-operatives or mutuals.

Greater Bank offers the best one-year fixed rate of 3.58 per cent. Easy Street Financial Services tops three-year fixed loans at 3.69 per cent and ING’s 3.98 per cent is the cheapest five-year fixed rate. These are based on a $1 million loan for a borrower with a 20 per cent deposit and principal-and-interest repayments for a 25-year loan.

By comparison, the average standard variable principal and interest loans for an owner-occupier is about 4.41 per cent. 

Loan increases

The big four banks, which account for about 70 per cent of loans, have increased their rates on average for interest-only investors by 54 basis points during the past 18 months since regulators imposed caps on lending to cool over-heating markets, says research house and comparison site Canstar.

Other lenders have increased rates by between 20 and 27 basis points, its analysis shows.

They are also increasing fees or raising rates for existing borrowers to subsidise new borrower’s cheaper rates.

Lenders are determined to keep growing their loan books, increase profits and raise dividends for shareholders by offering great rates to property buyers, despite slowing property markets and rising funding costs.  

Fixed-interest rates  do not change during a specified period or term. Typically one to five years are available, with two years the most popular. CBA recently pulled its seven-year fixed loan.

Fixed rates are available on investor and owner-occupier mortgages.

They allow easier planning for stretched family budgets with the certainty of fixed monthly repayments.

“They give property buyers some degree of certainty,” says Chris Foster-Ramsay, principal of Foster Ramsay Finance.

“But the potential pitfall is if personal circumstances of the borrower change, such as unforseen rise in costs or loss of income, they can be expensive to get out of,” Foster Ramsay says.

He recommends creating payment options by splitting the mortgage between fixed and variable.

“It allows extra payments with flexibility if there are unforeseen changes,” he says.

Beware pitfalls

Fixed rates protect against rising market interest rates for the term of the fixed rate, which could be very attractive as lenders begin to hike headline rates.

But there are also disadvantages.

For example, the loan repayments will not go down if market rates fall during the fixed rate period. Most analysts predict the next move by the RBA will be an increase. But volatile global markets, which are being worsened by trade disputes, could change conditions. 

The overall setting up costs may be higher than other types of loans, typically around $1000.

There may also be limits on extra payments, with redraw facilities on any extra payments not allowed.

Many lenders allow an offset account to be linked to a loan account with a fixed rate but no offset benefits are applied during the fixed term.

Also, redraw is not available on accounts during the fixed term but any additional payments made into the account can be accessed at the end of the fixed term.

Borrowers will also be hit with high break fees if they pull out mid-term. That’s because a lender offering a fixed rate term takes on the risks of any rate movements by tapping into wholesale money markets.

For example, the estimated break fee on a $100,000 loan terminated four years before the end of the term where the effective wholesale market rate is about 5 per cent will be about $3600.

What to ask before you fix

  • Is it better for family finances and long-term strategy to split the mortgage to a mix of fixed and variable?
  • Check whether the lender provides support with all centres, a branch network and internet access
  • Be clear on total fees and charges. Request a detailed breakdown of upfront, servicing and exit costs.
  • Is the loan portable? Can you transfer the loan if you move to a new property? Will this incur break fees and a new set of establishment costs?
  • If you’re planning to leverage the equity in your home to invest in another property, remember that switching fees can be expensive.
  • Are you going to sell your property during the fixed term? Breaking a fixed loan can be costly. Charges for leaving variable loans are banned but some lenders still charge break fees for exiting a fixed-rate mortgage early.
  • If you require any equity for home improvements, renovations or other expenses, it’s worth knowing that some fixed-rate lenders will not release equity. Moving to a different lender could be expensive.
  • Check the lender allows making extra repayments during the fixed term. Most will limit this and impose penalties for over-payment.
  • If there’s a possibility of you withdrawing any extra payments, check the small print. Most lenders will not allow withdrawal of extra payments until the fixed term has expired.
  • Ensure you have the best rate by checking online comparison sites to make sure costs, terms and conditions are the most suitable.
  • Check the rate to which the loan reverts at the end of the fixed term. Is it the variable rate, or higher?

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