Although fixed interest rates are having their moment in the spotlight thanks to whispers of a cash rate change, what are the pros and cons to consider?
While interest rates are currently sitting at record lows almost on a global scale, many homeowners right around the nation are understandably anxious about what the future holds for them in the event of any changes.
For prospective home buyers and existing property owners alike, the timing and magnitude of any changes to interest rates is being closely watched. Even the smallest increase could mean hundreds of dollars more in mortgage repayments per month, especially considering growing rumours surrounding a potential hike to the cash rate as early as June.
While it’s not uncommon for lenders to offer lower rates to entice new customers, they often fail to look after their existing customers with the same benefits. Banks don’t make a habit of checking in with their customers to let them know if they’re potentially missing out on a better deal, which is why fixing interest rates is currently a hot topic amongst Australians from all walks of life – but is this really the solution to curbing the rising cost of living?
Understanding How Fixed Interest Rates Work
Choosing a fixed or variable interest rate for your home loan often comes down to how familiar you are with the interest rate cycle, and what the market is up to. With the world feeling slightly more daunting than usual – particularly if it’s your first big foray into a large scale loan – you should be paying extra attention to your financial commitments, and how these changes could potentially impact you and your mortgage.
When compared to a variable interest rate, or one that fluctuates along with global economies, fixed term interest rates can provide stability, certainty and security. Although they traditionally sit slightly higher than variable options, fixed interest rates provide protection against fluctuating financial markets.
The primary benefit of a fixed rate home loan is that it gives consumers the certainty of knowing that their repayments won’t change over the fixed interest period, which is usually between one and five years. Should the interest rates rise, having a fixed rate loan means no increase in mortgage repayments until the fixed term expires.
Considering all of the potential benefits that fixed interest rates offer, what do you have to lose? Well, it’s important to note that loan products with fixed rates rarely feature some of the best benefits of a mortgage, such as access to an offset account or the ability to redraw, as well as limits on making extra repayments. In addition, there are also some pretty hefty fees to consider if you break your fixed term agreement – even in the event that you actually sell the property that your mortgage is tied to.
The solution for homeowners looking for the best of both worlds are split loans. In simple terms, split loans are a home loan or mortgage product that is ‘split’ into multiple loans with different interest rates. One of the most common examples used in today’s market is a home loan that has a variable interest rate component, with the remaining amount linked to a fixed interest rate.
Although there are no limits on how much a client can allocate to each portion of the split loan – for example 60% fixed, 40% variable, etc – what you are essentially doing is distributing interest rate movements, as well as the relevant risks that may apply or be associated with each feature. While most lending providers offer borrowers the ability to split their loan, it’s not necessarily a valid option on all of their products. As such, it’s always worth checking whether the particular loan product that you are considering can be used as part of a split arrangement.
Given the current state of the property market and an interest rate rise looming on the horizon, rate lock is another feature that buyers really should consider in the immediate future. A rate lock is usually applied before a fixed rate home loan settles, as processing your home loan application does indeed take some time.
Depending on the lending provider and the rate lock options available, once you ‘lock’ in the interest rate with them, the rate you apply for will be secured and confirmed for up to ninety days before your loan settles. In a nutshell, you remove the risk of being caught out with a change to interest rates while you get the paperwork sorted. Depending on your lender, rate lock can cost as little as $500 – while the peace of mind is priceless.
As of September 2021, mortgage brokers wrote 67% of all residential home loans in Australia – the highest number ever recorded. What’s more is that 90% of these customers reported that they were happy with the services provided to them. If you’re thinking about applying for a mortgage or are about to be, then it’s worth getting in touch with the professionals.
Partnering With Home Loan Professionals
Navigating the complex world of home loans has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on sourcing how mortgages work, then the good news is that it doesn’t have to be.
Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.
If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.