Home owners are being told to do their research before fixing their mortgages, after the Reserve Bank held interest rates at 0.1 per cent on Tuesday.
With little room for interest rates to fall further and negative rates unlikely in the face of a stronger-than-expected economic recovery, many mortgagees will be wondering whether now is the right time to lock in their rate.
But although analysts told The New Daily that rates were unlikely to fall much lower, they warned home owners against rushing to fix, as variable loans are more flexible and changing loans can be expensive.
RateCity.com.au research director Sally Tindall said fixing home loans would make sense for some people, as banks were offering some of the lowest fixed rates on record.
But she said they typically have caps on additional repayments, which prolong the length of the loan, and often have no access to an offset account.
“Plus, if you want to get out early, there can be hefty break fees,” she said.
Canstar editor-in-chief Effie Zahos said fixing your mortgage seems like a “no-brainer” at the moment, given the average Big Four customer is paying 3.6 per cent and the cheapest three-year rate is 1.75 per cent.
Ms Zahos said someone making that switch would save about $370 a month and “sleep well at night knowing [their] payments are going to be set at that amount over a period of time”.
But she advised home owners to read the fine print first.
Firstly, she said, people who refinance should avoid extending the term of their loan.
So, if they initially took out a 25-year mortgage and stayed with their lender for five years, they must ensure their next loan has a 20-year term.
“Otherwise the benefit of going to a cheaper loan is wiped out, because you’ve extended your term [and will therefore pay more interest over the life of the loan].”
Secondly, borrowers should check whether they have money in a redraw or offset account.
Offset accounts are easily accessed and will have no impact on their refinancing plans. But redraw accounts are held within the home loan, so borrowers will need to decide with their lender whether they withdraw the money held in this account, or let the lender absorb it into the loan, which would reduce the amount they need to borrow.
“You’ve got to make a call on that, otherwise you could lose [access to the money],” Ms Zahos said.
Finally, borrowers should find out how much their lender will charge to switch loans, so they can work out how long it will take to break even after switching.
“You have to add up all the fees it takes to move – and there are fees, because you may need a valuation fee, you’ll have a settlement fee and a discharge fee,” Ms Zahos said.
“And if it costs $1000 to switch, and you’re only saving $50 a month, it will take you 20 months to recoup the costs of moving – [by which point], can you guarantee your new lender is going to be the cheapest in the market again?
So, if you’re just chasing the rate, you’ve got to be careful that you don’t get caught out [with] high fees.”
Ms Zahos added that not all home owners will be able to secure a competitive fixed rate, as the lowest rates are only available to people with low loan-to-value ratios.
“And if you have borrowed over 80 per cent and are still highly geared … then you may have to pay lenders mortgage insurance again if you switch,” she said.
“My biggest gripe with lenders mortgage insurance is that it’s not portable between lenders.”