The big banks have given borrowers some of the most attractive home loan deals ever, with homeowners able to set their rates below 2% for four years.
Experts say it could be a once-in-a-lifetime chance to lock in record rates.
âI’ve never seen a better time when it makes more sense to repair a lot of your debt than now,â says David Johnston, Managing Director of Property Planning Australia. âWe may never see fixed rates this low again. “
Refinance savings calculator
Calculate how much you could save on your home loan.
The RBAs recent drop in spot rates and bond purchase program increased the difference between fixed and variable rates.
The average two-year fixed interest rate is 2.3 percent, while the average variable rate is 3.33 percent, according to Canstar.
But before getting started, borrowers should first understand the limits of fixed rate loans.
One of the tradeoffs of fixed rates is reduced flexibility to make additional repayments, says Steve Mickenbecker of Canstar.
âA lot of fixed rate loans don’t have compensation, and a lot of them don’t have repayment,â he says. “If you inherit $ 50,000, you may not be able to reduce your loan by that much.”
Borrowers can choose to fix part of their loan and leave the rest variable. Often referred to as a split loan, this allows borrowers to plan for changes in their circumstances to allow for additional repayments, Johnston says.
âThe really important thing to do is make sure that your variable rate for those three or four years covers what you think you can save and pay back, plus some buffer,â he says. âYou have to choose very carefully how much you keep variable with leeway depending on how your income grows. “
It should be remembered that not everyone will be entitled to a fixed rate loan below 2%, said PRDnational chief economist Diaswati Mardiasmo.
“[Lenders] get a little more stringent in that they really look at your spending habits and your lifestyle, âshe says.
Borrowers who are considering refinancing a low fixed rate loan should ensure that the savings thus made are put to good use, rather than just spent.
âIt can be too good to be true if you don’t deal with it smartly and look at your situation holistically,â says Mardiasmo.
What if rates fell further?
The RBA’s record low cash rate may not be quite at its lowest, according to Mickenbecker.
âRates could go down, there’s no doubt about it,â he said. “It’s a great rate environment to correct, provided you know it could drop further and you’re not someone who will be jealous of interest rates.” “
If homeowners choose to repair and face changing circumstances, the possibility of further rate cuts could create risk, according to Johnston.
âIf the economy isn’t picking up and is actually getting worse, and we have to look more at quantitative easing and negative rates, if you have to sell or refinance, there are exit costs,â he says. .
Banks borrow funds for fixed rate loans in financial markets and if a borrower prepays a fixed loan, the original loan term of the lender remains the same. Banks will therefore charge what is known as a breakdown cost or an economic cost to borrowers who prepay a loan, even at the time of the sale.
âThe economic cost basically compensates the bank for not being able to put out another loan,â says Mickenbecker.
If the financing costs decrease during the specified term, the break-up costs can be significant. The more interest rates fall, the higher the break-up costs will be.
Fortunately for repairers, the rates shouldn’t drop much more. “The risk is nowhere near as high today as it would be if you set a higher rate, âsays Mickenbecker.
So who shouldn’t fix? “Anyone who, for whatever reason, is uncertain, whether in their own job or in their own industry or in your partner’s job or industry, or if there are potential health issues in your family, âsays Mardiasmo.
âWhen you go into something that is fixed, you want to be sure that your situation is as resolved as possible. “