Time To Lock It In
Newcastle Herald
Monday October 20, 2003
Now's the time to consider locking in the rate of your home loan, reports Christine Long.
HINDSIGHT is a fabulous thing. It allows you to curse yourself when you see how much better off you would have been if you'd got into the property market a decade ago.
The same goes for signing up to a fixed rate home loan. We've all heard the stories of people who wished they hadn't jumped so quickly to fix when they found themselves stuck paying rates in the high teens while others got the benefit of falling rates.
But when you hear the predictions of increasing rates, it is hard not to wonder whether you would be better off fixing.
Lisa Montgomery, the head of consumer information and advocacy at Wizard, says people need to be aware that the international and domestic influences on the international bond rate which determines the level of fixed rates can change very quickly.
As she points out, we have just come through a period where fixed rates were looking very competitive.
``In comparison to eight to 10 weeks ago, fixed rates have actually increased by between 25 and 40 basis points [0.25 and 0.4 percentage points]. It is probably still beneficial to fix but fixed rates have increased," she says.
However, she emphasises: ``Anybody who goes into a fixed rate loan is taking a bet that it is going to be the best rate for their mortgage and they need to base that on their own circumstances."
Warren O'Rourke, the head of corporate affairs at Mortgage Choice, suggests fixed-rate loans can be particularly useful for first-home buyers or anyone who might find it difficult to cope with higher mortgage repayments.
A quarter of a percentage point rise in rates may mean only an additional $30 a month for borrowers with an average-sized home loan. But for some households that amount could be unmanageable, particularly when recent housing affordability surveys show Sydney households are channelling about 40 per cent of their household disposable income into mortgage repayments. In Melbourne, the figure is 30 per cent.
An alternative for people who want some of the security of knowing what their repayments will be coupled with the ability to make additional repayments, is to split.
As O'Rourke says: that way borrowers can ``attack" the variable part of their loan with additional payments.
Kathlene Jones, the director of research and client solutions at Cannex, suggests making a 50/50 split. ``Then whichever way [interest rates go], you're a winner."
Borrowers who decide to go for a full or partial fix will also need to consider what might be an appropriate length of time to lock into current rates. Again, the right decision will come down to the needs and preferences of individual borrowers.
Jones says the question borrowers need to be considering is: ``How long do I want that certainty for and how much am I willing to pay for it?"
Based on the annualised average percentage rate (AAPR), the top five-year fixed mortgage rates are about 0.32 percentage points higher than the top one-year fixed mortgages.
Someone who knows they will not be working for a couple of years after having children may prefer the certainty of a three-year fix to a one-year fix. Conversely, someone who needs a fixed rate now may gamble on having secured a much promised pay rise within two years.
``People's circumstances can change significantly in two years."
If you plan to lock into a fixed rate, make sure you get the best deal. The best fixed rates are offered by the non-banks and credit unions.
However, Jones advises borrowers to always look beyond the advertised rate. ``Fixed products do compete so much on that upfront rate," she says.
The picture can look very different when the AAPR is considered because of the impact of fees and charges. Also be aware that most fixed rate loans have early repayment penalties or break fees, which will apply if borrowers want to bale out before the end of the fixed term. SMH
© 2003 Newcastle Herald
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