Loan rates are at 30-year lows but while most home borrowers worry about the direction of variable rate mortgages, only a minority consider the benefits of a fixed option.
However, in this freakishly low interest rate environment, many borrowers can no longer afford to ignore fixed rate offers.
Historically, lenders have usually priced fixed-rate home loans up to 1.5 per cent above their variable rates.
But since February that longstanding trend has begun to reverse with many lenders now offering fixed mortgages for two and three years at rates below their standard variable loans.
According to financial services research house CANSTAR, the 20 cheapest home loan rates in the country are now fixed rate offers from a clutch of banks, credit unions and building societies.
The cheapest one-year fixed rate mortgage is marketed by Hume Bank at 3.7 per cent. Homestar Finance is next best with 3.85 per cent.
The best rate on a two-year fixed rate home loan is Newcastle Permanent with an offer of 3.89 per cent.
HSBC is offering a three-year fixed rate of 3.95 per cent if the amount borrowed is more than $500,000.
A string of lenders are marketing three-year mortgage products fixed at 3.99 per cent. They include Bank of Queensland, Qld Police Credit Union, ME Bank, Newcastle Permanent and iMortgage.
Fixed rate bonanza
The notion that mortgages could be priced under four per cent was almost unthinkable a few years ago. The fact that they are fixed rate loans, rather than variable mortgages, is remarkable.
According to CANSTAR, the cheapest variable rate mortgage available in the Australia is priced at 4.19 per cent.
But the average rate for standard variable home loans across the market is 5.12 per cent.
This means that even if the Reserve Bank was to cut official rates in the next few months, most variable rate mortgages would still be more expensive than the fixed rate offers highlighted above.
Should you be fixing?
According to CANSTAR spokesperson Justine Davies, the decision is almost a “no-brainer” for new homebuyers.
“Technically, I think these fixed rate offers should be attractive to almost anybody, but they probably appeal most to people who have bought houses recently and are carrying large debt,” she said.
“The more you owe, the more attractive fixed rates are.”
Ms Davies described the recent repricing of fixed mortgages as an important shift in the home loan market that was likely to lure more borrowers away from variable products.
“In the last few years we’ve seen the number of people locking in rates on their mortgages has begun to increase,” she said.
“It is a significant shift in the pricing strategies of lenders and it is likely that more people will be looking to fix.”
Before you fix …
For young homebuyers about to acquire a home, a fixed rate home loan seems the most sensible option.
However, existing borrowers contemplating a switch to a fixed rate mortgage need to consider a few traps before taking the plunge.
If you already have a variable mortgage the biggest impediment to making a switch are the break fees that many lenders charge for exiting a loan contract.
In many cases these fees can run to thousands of dollars and erode the cash benefit of the lower fixed rates.
Some lenders are less punitive on borrowers who would like to switch to a fixed home loan so long as they don’t change lenders as well.
While many lenders impose costs on variable rate borrowers for switching, some will accommodate applications to split their interest between variable and fixed.
“Splitting your interest might be a good way to hedge your bets,” said Ms Davies.
“It does give borrowers some certainty on the interest repayments for part of the loan that you’ve locked in.”
Tips for fixing your home loan
• Inspect your home loan contract to see what the break fees are.
• If you intend paying off your home loan early then tread carefully before switching from a variable rate loan because most lenders impose limits on how much you can repay under fixed loan contracts.
• Consult the CANSTAR fixed rate mortgage tables here
• If you’re about to enter the housing market and have a limited capacity to repay the principal in the initial few years then you should be probably consider a fixed rate mortgage in the current market.