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Current fixed-rate offerings are at historically low levels in Australia. This is not a bad thing, but you need to be wary of the pitfalls that come with this type of offer. In recent months, we’ve seen many lenders pass on rate cuts only through their fixed-rate products. Despite the valid concerns and caution voiced by experts, there is a way to make a switch to a fixed-rate offer, whilst protecting yourself. Let’s take a quick look at what you need to be aware of.
The Revert Rate
A home loan with a fixed interest rate will have a period (normally after several years) in which your initial fixed rate will shift. Your fixed-rate period will end, so you want to be sure that your revert rate is competitive. This means ensuring the rate won’t be higher than the standard variable rate the market is offering.
For example, you might take a fixed rate of 1.99% for 3 years, then by the end of the three years, your rate may revert to 4%, whilst the standard variable rate is sitting at 2.5%.
You need to be careful that the revert rate on your loan won’t be significantly higher than the standard variable rate that the market offers when the fixed-rate period ends.
This is definitely something you should raise with your broker if you’re considering a fixed-rate home loan, because they’ll work out whether the revert rate and the fixed rate matches up to give you a cheaper deal, than maybe a clean variable rate home loan would instead.
Most lenders don’t offer revert rates significantly higher than the market average, but there are exceptions. There have been circumstances where lenders will use the revert rate to increase their takings to recover the benefits you received during the fixed-rate period. Obviously you want to avoid fixed-rate products that are structured this way.
Additionally, take the time to gain a clear understanding of possible break costs. Exit fees may apply should should you choose to end your loan or refinance. If you find yourself in a position where your revert-rate is just too high, it’s necessary to understand how easy or expensive will it be for you to make a switch.
Home Loan Features
It’s well known that most fixed rates offerings come with the caveat of less flexibility in terms of ‘paying in more’ as well as increasing the frequency of repayments -crucial features if you’re looking to pay off your loan faster. However, as the mortgage landscape becomes more competitive and evolved, you will find fixed-rate products that offer most or even all of the benefits of a variable rate home loan – benefits like a redraw facility or offset account.
The important thing to do is to list out a few options, with thorough market research of the different products on offer. Mortgage brokers engage in this process with every borrower, carefully weighing the saving benefits from a lower fixed-rate product with the availability of loan features that might benefit you. A broker will ensure you’re not compromising on essential loan features just for the sake of an extremely low fixed rate.
If you find it hard to navigate the complexity of the mortgage market, engage a mortgage broker to help you out. A mortgage broker gets paid by the lender upon loan settlement. So, their services are usually free for borrowers. Our experienced brokers will look at your individual needs, weigh up the pros and cons of all the options available, and give you the best deal for you and your circumstances.
The flexibility of part-fixed, part-variable loans
Lenders commonly offer products where you can fix a portion of your loan, so that you can access all the loan features you need.
Fixing part of your loan means placing part of your loan on a fixed rate, with the remaining loan amount on a variable rate. This can be a great way to access the benefits of both products.
The key here is to benefit from the current all-time low fixed rates, without compromising on essential home loan features and finding yourself with an unreasonably high revert-rate.
Your best approach is to rely on the professional advice of an experience home loan expert. They will get an understanding of your financial goals, scope the market for the most competitive fixed-rate offerings that include the flexibility you need in your circumstances. Reach out to us today to start your home loan journey!