With rates at record lows, more and more investors are turning to fixed rates — but if you change your mind, what sort of costs are you facing?
Blogger: Bob Korver, owner, Mortgage Choice Eight Mile Plains
Two cuts to the official cash rate in 2016 has helped take home loan interest rates to all-time lows.
And it is not just variable rates that are sitting at low levels. Today, most lenders are offering incredibly sharp fixed-rate pricing.
If you are looking for some certainty around your home loan repayments, then a fixed-rate home loan (or a split rate mortgage) may be the ideal solution for you.
As the name would suggest, a fixed-rate home loan is a mortgage that boasts the same fixed interest rate for the duration of your preferred fixed period.
Generally speaking, people will fix their mortgage from somewhere between one and five years, with three-year fixed-rate products being the most popular across the country.
And while there are many benefits associated with fixed-rate home loans, there are also some pitfalls associated with this type of product.
One pitfall associated with a fixed-rate mortgage is the break fee.
There are couple of ways you can be charged a break fee, namely:
- If you switch to a different product and/or lender before your fixed-rate home loan term has expired;
- You make additional home loan repayments in excess of the amount stipulated by your lender;
- You repay your loan in full before the fixed rate term has expired;
- You default on your mortgage repayments.
Depending on the size of your fixed-rate mortgage and how much time you have left in your fixed-rate loan term, a break fee can be very expensive.
Lenders will typically finance your home loan on the wholesale market with a fixed maturity date.
At the time you switch loans or repay your loan early, your lender will use the Bank Bill Swap Rate (BBSR) or BBSW to calculate your early repayment cost.
Of course, it is important to note that break fees will vary from borrower to borrower and lender to lender. As such, it is important to consult your lender before you decide to break out of your fixed-rate home loan.
If you are currently in a fixed-rate product and would like to break free from the mortgage, I can help you identify exactly how much your individual break fee might be.
I can also talk to your lender about having your break fee reduced and/or removed.