As rates hit rock bottom, is now a good time to fix part of your mortgage?
Australian households have used the coronavirus lockdown to reconsider the cost of one of their biggest expenses: Their mortgage.
With interest rates at historic lows and the Reserve Bank hinting further cuts are unlikely, home owners are looking to secure a rock-bottom deal.
Broking firm Mortgage Choice saw demand for overall refinancing and fixed-rate loans jump 16 per cent and 8 per cent respectively from March to April.
And Hero Broker founder Clint Howen believes they might be on to something.
“The Reserve Bank governor has said interest rates will not fall to zero, and bearing in mind they are looking at alternative measures to prop up the economy, it’s a good time to lock those rates in,” Mr Howen told The New Daily.
He cautioned, however, that fixing rates for longer arrangements of up to five years was risky and like betting against the house.
Some of the major lenders have continued cutting interest rates despite the RBA holding the official cash rate at 0.25 per cent since March.
For example, Westpac last week slashed the interest rate on its Flexi First Option Home Loan by 24 basis points to 2.69 per cent (for loan-to-value ratios up to 70 per cent).
But although fixed rates have dropped to historic lows, Mr Howen said it’s possible variable rates will eventually drop to the same level.
For [fixed] terms of three to five years, you’re basically betting against the bank that this is where rates bottom out,” Mr Howen said.
“There are people who believe they have found a red-hot deal and lock themselves in for five years, and then two years into that agreement realise their position could have been much better and consequently incur pretty hefty break costs.”
Fixed home loans offer less flexibility, but you can get the best of both worlds
Although fixed home loans generally offer lower rates than variable-rate products, they provide less flexibility.
Centaur Financial Services managing director Hugh Robertson said it was unsurprising more of his clients asked about refinancing since Australia’s coronavirus lockdown began.
“When times get bad, we want to look at where all our money is going and [home loans] are an obvious area because you are dealing with a large sum of money,” Mr Robertson told The New Daily.
Fixed home loans generally impose strict limits (ranging from $10,000 to $30,000 per year) on how much borrowers can pay on top of their minimum repayments.
An alternative is to have a bet each way.
By fixing part of a home loan and pushing providers for a discount on the variable portion of a mortgage, customers could retain control of their repayments, Mr Robertson said.
Mr Howen agreed that part-fixing allows home owners more flexibility, but warned customers would be paying more in administrative costs as they are essentially managing two home loans, instead of one.
“It’s an individual approach,” Mr Howen said.
Check your bank is applying the right loan-to-value ratio
Mr Robertson added that major lenders profit from customers not understanding how loan-to-value ratios (LVR) change over time.
Lenders charge higher interest rates on loans with higher LVRs as they pose more risk.
This means customers may be charged unnecessarily high interest rates well after their provider has conducted the initial valuation assessment.
Say you purchased a $450,000 property with a $400,000 loan and the property itself has increased to $600,000, your LVR has decreased from around 88 per cent to 75 per cent, but your bank is not obligated to offer you a better loan,” Mr Robertson said.
“That’s why if you go and talk to your bank, they might say: ‘Hang on a second, based on what you have just told us, we’re willing to look at it’.”