May 26, 2020
Traditionally, Australians have always favoured variable rate home loans, but over the past month fixed-rate home loans have been gaining traction, with reports of increased sign-ups for the product. This is thought to be due to the current low rates being advertised by some lenders.
After the RBA’s emergency cash rate cut in March, some lenders chose to cut fixed rate products. However, for those customers interested in variable rates, these remained unchanged.
Historically, fixed rate home loans are significantly low. After March’s emergency rate cut, the big-4 banks all chose to slash figures on fixed-rate products.
According to Commonwealth Bank, an increased interest in fixed-rate products has been seen over March, telling 9News that that enquiries in one, two and three-year products almost doubled on the previous month.
Other big banks, Westpac and ANZ also saw increased interest over March, telling 9News that there had been an increase in the number of borrowers looking to fix their whole loan or at least part of it, leaving the other half variable.
Despite the usual pull of Australians towards variable rate products, Mozo Banking Expert, Peter Marshall, believes that the increased popularity makes a lot of sense.
Given that fixed rates are becoming cheaper than variable rates it’s easy to understand the appeal that we will see more borrowers opting to fix, he said.
Marshall, however, warns that break fees should be taken into account before committing, including the consideration that the reversion rate at the end of the fixed rate period can often be much higher than what was locked in.
It’s always important to keep in mind that there may be break costs if you need to leave the loan early, although if rates are increasing when you want to break those costs will be minimal, he said.
While banks are inviting COVID-19 impacted customers who are struggling with home loan repayments, to approach them about taking a mortgage holiday, this might not be the right solution for everyone.
For some customers, approaching their bank about getting a decrease in their interest rate might be the more suitable option.
Emma Lawrie, a midwife, mother and fixed rate customer told 9News that after approaching her bank multiple times, she was able to get out of her fixed interest rate of 3.99% and move to a new two-year deal of 2.19% without paying any break fees leading to a saving of $400/month.
She is advising others in similar situations to think about doing the same, noting that the banks are claiming that they’re there to help on their websites.
“Don’t take no for an answer but I think it’s also really important to be courteous and kind with whoever you’re speaking to.”
Ratecity money editor, Sally Tindall agrees that it’s always worth asking your bank about lowering your interest rate.
“If you do not ask, you do not get,” she said.
“Banks are putting record low rates on the table, particularly fixed rates at the moment.”
Fear of the unknown often prompts customers to fix their mortgage rate however, this can also come back to bite them. If interest rates decrease, variable rates often go down with it, leaving fixed customers in a position where they can’t take advantage of the new low rates.
Often, fixed rate products also limit the number of extra repayments that can be made, and if you want to exit the product and switch to a variable rate, there are often costly break fees.
- Costly break fees
- Inability to take advantage of sudden lower variable rates
- Sometimes a limit in number of repayments that can be made
Despite the negatives, increased certainty is definitely a plus of fixed rate products, and more many customers, the product’s major drawcard.
Fixed rate customers are often able to better plan their finances with an interest rate that stays fixed for a certain period of time. A fixed-rate home loan can also help to shield customers from any potential interest rate rises.
- Increased certainty
- Easier to plan finances
- Better shielded from interest rate rises
- 9News https://www.9news.com.au/national/coronavirus-home-loans-people-urged-ask-banks-for-mortgage-assistance/72554ef8-3ea9-4793-b02d-12c722bc9210
- Mozo https://mozo.com.au/home-loans/articles/fixed-rate-cut-frenzy-why-most-lenders-aren-t-slashing-variable-rates
Written by Refinancing.com.au
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