Fixed Loans – Pros & Cons

Fixed Loans VS Variable Loans

So you’re about to take out a home loan – should you fix the interest rate or take a variable rate…. or both?

Fixed loans – pros and cons

The interest rate will stay the same throughout the fixed period of your loan, so regardless of interest rate changes in the market, your repayments will remain unchanged – this security of an stable interest rate means you know what your repayments will be, which gives peace of mind.

The fixed rate does not last for the whole period of the loan and is typically between one and five years. After the fixed period has ended, the rate will change to a ‘revert rate’ which will be variable, and which may not be the lender’s most competitive rate. At this time, Golden Eggs Home Loans can assist you to determine if your loan is still suitable or whether it is in your best interest to switch products or re-finance to an alternative loan.

A fixed rate mortgage is often less flexible and has fewer features than variable loans – for example you may not be able to make extra or early repayments, or have access to offset accounts or redraw facilities, although some products will allow these so it is important to ensure that any fixed loan you are considering has the features that you require. Even if you are able to make extra repayments, these may be limited and if you pay over and above your allowance, you may be charged a fee.

Fixed rate loans have significant penalties for early termination (and the earlier you terminate, the higher the penalty) to compensate for the lender’s lost interest, so if there is the possibility of you selling the property, wanting to re-finance or pay out the loan during the fixed period, this type of loan would not be suitable.

Note that the fixed rate on offer at the time of initial discussion or application may change (increase or decrease) during the period from the loan application to settlement of the loan. In other words, the fixed rate on the loan may be higher (or lower) by the time the loan settles. Many lenders offer a ‘rate lock’ facility, where they charge a fee to guarantee that the rate will not move from the point of application through to settlement (generally around 0.10% to 0.25% of the loan amount).

A fixed rate loan may have a higher rate than variable rate loans, and even if the fixed rate is lower, variable rates may drop and catch up with, or become more competitive than, the fixed rate.

Variable loans – pros and cons

A variable rate home loan has a fluctuating rate for the term of your home loan, so if interest rates go up, so do your monthly repayments. Conversely, if rates go down, so do your payments – this introduces risk as no one really knows what rates will do in the future. Also, lenders do not always mimic changes made by the Reserve Bank of Australia – this makes it more difficult for you to budget and does not offer the same security as the fixed rate.

Variable rate loans are often more flexible in areas such as redraw and early repayments – in which case you can pay extra when you can afford it. Making extra repayments reduces the total interest payable on the loan, also reducing the term of your mortgage and increasing the amount of equity in your home (providing your home value remains constant or increases). If a re-draw facility is available, you can withdraw some or all of those funds if they are needed down the track. You can also pay out your loan if you re-finance to a better loan, or move house.

So what should you do?

No matter what economists, media and the market say, no one knows which way rates will go – in addition to market cycles and Australian economic conditions, there is still a lot of uncertainty and the chance of more volatility ahead.

If you are considering a fixed rate, you need to:

  • check that the loan has the features you want
  • understand that getting out of the loan before the fixed period expires will have financial consequences, and these could be severe
  • make sure the interest rate will be honoured while the lender processes your loan (and note that there is often a fee to lock in the rate)

The key with fixed rate loans is to view them as a way to achieve repayment certainty – not necessarily as a way of saving money.

When considering a variable rate loan, you need to plan and budget for increases in interest rates, and make sure that you’re able to meet your repayment obligations should rates rise by, say, an additional 2%.

Note that you can split the home loan so it is part fixed and part variable, giving you the security that at least part of your loan is locked in at a rate you can count on. Please contact us with any questions or to discuss your options.

Four ways to get a better deal on your home loan

The RBA has yet again kept interest rates on hold, but that doesn’t stop you getting a better deal on your home loan right now!  Here are four simple ways to lower your repayments, or pay your loan off faster in today’s competitive environment. As a quick guide, a 0.3% interest rate saving on a $400,000 loan, will save you $1,200/year in interest costs – that’s $100/month!

1.  Negotiate a better deal with your current lender – just give us the go-ahead and we can do this for you; with several banks so inundated with these requests, that they’ve automated the process online. No exit fees, minimal paperwork and very fast to implement, but from recent experience with this, they may not be as flexible with the rate as with other suggestions.

2.  Top up your current loan, to access existing equity – this will trigger a new loan application, which automatically gives you access to the better rates that your lender is giving to new borrowers, that previously wasn’t available to you.  We would need some documents from you and we can then apply for extra funds for another investment property, some renovations, or a new car and the repayments at the lower interest rate are likely to be similar to the old loan at the old rate.

3.  Switch lenders – with the current red-hot November special being offered to anyone with a loan of less than 80% of the CURRENT market value 4.69% ongoing variable (1.3% below SVR) – with a up to 10 offset accounts and NO ANNUAL FEE for the life of the loan.   There will be some discharge fees and state government fees to pay, but these are typically only around $500 and the annual fee saving alone is worth $375/year.

4. Switch to a fixed rate – Just let us know how long you’d like to fix for an how much of the loan you’d like to fix and we can access 1 year rates as low as 3.99%, 2 years at 4.49%, 3 years at 4.59% and 5 years at 4.69%, but these also vary by lender, so your current lender may have fixed rates higher than this, but still better than your current rate.  Again, minimal paperwork and costs, just let us know.

We’d love to hear from you, especially if it’s been a while since you have reviewed your loan. Our office is expanding so we can help more people buy and hold property over the long run.

P.S. please feel welcome to share this with your friends and family and we’ll be happy to help them too.

Benefits of a Strong Credit Rating

A few months ago we sent a newsletter to advise that changes to credit reporting had been introduced, and that any repayment more than 5 days late could be listed on individual’s credit reports.

For those of you that are financially responsible and not expecting to have any negative listings on your credit report, the news probably didn’t seem too relevant. What might be of interest though is that the new laws may bring about positive changes. On-time repayments can now also be included on credit reports. In addition, credit reports now have a score.

It has been suggested that Australia may follow the path of other countries where there may be access to lower interest rates for lower risk borrowers. So paying your loans and bills on time will not only avoid a black mark on your credit report, but should also lead to a better rating. It could take some time for this to filter through as banks may need to update their systems to be able to report and make use of this information, but it is worth keeping in mind.

If you would like a copy of your credit report, you can apply here and it will be supplied by Veda within 10 days. If you don’t want to wait that long, contact us to request a copy of your report.

Mortage Wars

5 August 2014: True to form, the Reserve Bank of Australia announced today that rates would be kept on hold again. The RBA have judged that rates are at an appropriate level to support growth in the economy and still expect “a period of stability in interest rates”. They do note that “long-term interest rates… remain very low”.

You may have recently seen reports in the news of ‘mortgage wars’, with many of the banks dropping their fixed rates. This caught the media’s attention when the ‘big 4’ got to below 5% for longer term fixed rates, but as many of our clients know from their own loans, a number of non-major banks already had rates below this and remain very good value.

We periodically review loans of existing clients of Golden Eggs Home Loans and make contact if there is scope for further savings. For those of you that we haven’t yet assisted, we would love an opportunity to chat to you. There is a lot of competition between banks at the moment so there’s never been a better time. Contact us today.

NEW FINANCIAL YEAR – NEW CHANGES

1 July 2014: As widely expected, the Reserve Bank of Australia announced today that rates would be kept on hold again (Media Release/2014).

The RBA still note a mixed bag of economic indicators, some improving and some stubbornly unhelpful (hello, Australian dollar). The bottom line continues to be “a period of stability in interest rates”.

In related news, with the start of the new financial year today there are some changes as follows:

  • Additional 2% levy for taxable income over $180,000
  • Medicare levy to increase to 2% (from 1.5%) payable on taxable income
  • Superannuation guarantee to increase to 9.5% (from 9.25%)
  • Concessional (pre-tax) superannuation contributions caps will increase to $35,000 for those aged 49 and over; and $30,000 for everyone else
  • Non-concessional contributions caps increase to a annual limit of $180,000 (from $150,000).

If you have any questions regarding these points, contact us at Golden Eggs Home Loans.

NO CHANGE TO INTEREST RATES – MAY 2014

At the May board meeting of the Reserve Bank of Australia, it was decided to keep rates on hold again (Media Release/2014). This is no surprise as the RBA have been advising that there will “be a period of stability in interest rates”.

The RBA note that in Australia, there appears to be moderate growth in consumer demand, and some indication that business conditions and confidence have improved. In addition, there has been some improvement in indicators for the labour market although they expect it will be some time before unemployment declines consistently.

However resources sector investment continues to decline significantly and public spending is also expected to be subdued (we will know more in next week’s Federal Budget).

Inflation is expected to be within target over the next two years, and the RBA reiterate that rates are expected to be stable to foster sustainable growth.

As to when they might rise, the Sydney Morning Herald reports that according to Credit Suisse, financial markets have wound back their rate hike expectations, with around a 50% chance of an increase in rates in the next 12 months.

In terms of home loan interest rates, fixed rates can in some instances still be lower than variable rates, so if you would like to find out more, please contact us.

A PERIOD OF STABILITY IN INTEREST RATES

At the April Reserve Bank of Australia meeting, the Board have kept the cash rate unchanged at 2.5% (Media Release/2014). There’s no news there, as the RBA have been quite clearly stating we will have a period of stability in interest rates.

Their announcement states that inflation is expected to be consistent with target levels of 2% to 3% over the next two years. While parts of the economy require stimulus, the concern would be that dropping rates could overheat the already hot housing market. On the other hand, increasing rates could push the Australian dollar higher, which the RBA definitely don’t want.

At Golden Eggs Home Loans, we will continue to keep you informed regarding the interest rate environment and as always, if you wish to discuss what this means for you and your home loan, please contact us today.

Changes in Credit Reporting Could Affect Your Loan Approval

Late repayments to bills and loans are now added to your credit report.

New laws regarding Australian privacy come into affect this month and one change involves extra information on your credit report – this could have positive or negative implications for you, depending on how reliably you pay your bills on time. A significant negative is that late payments could lead to future credit and loans not being approved.

What is a credit report?

If you have ever applied for credit or a loan, there will probably be a report about you with a credit reporting agency. Credit providers (for example, banks) use this report to assess your capacity to repay a new loan or credit card.

Your credit report contains information about your credit history:

* credit applications including loans, credit cards, utilities and phone/internet accounts

* who has accessed your report: i.e. each time you have applied or even just enquired about a credit card, loan or new account

* personal details: current and past addresses, employment, date of birth, licence number, etc.

What are the changes?

Up until now, a black mark was added to your credit report if you defaulted (also if you have been bankrupt or had court judgements, debt agreements or personal insolvency agreements in your name), but with the recent changes, any repayment that is more than 5 days late could now also be listed. You have likely started receiving notices from the banks about changes to their privacy policy which is related to this new legislation.

What does it mean?

To date, any defaults on your credit report could seriously impact your ability to get new credit. Even multiple credit applications or enquiries could impact how banks assess you when you apply for a loan.

The new changes could have far more negative implications as the bar has been dropped in terms of what gets reported. Late payments go straight to your report and can be seen any time you apply for credit in future, and could likely mean future loans are not approved.

All credit reports now come with a score (see example below) and it is possible that banks may start setting minimum scores for loan approval.

There is good news though for people who always make their payments on time – there has been talk of bigger discounts for those with higher scores.

There is one simple way to minimise negative marks on credit reports – set up direct debits for all loan repayments and minimum monthly repayments on credit cards.

Getting a copy of your credit report

If you would like a copy of your credit report, you can apply at Equifax Personal. If you can wait 10 days, this will be supplied at no cost. If you don’t want to wait that long, I can get a copy of your report instantly at no charge, contact us at Golden Eggs Home Loans today to find out more.

If you have any concerns about your report, please let us know and we would be happy to discuss with your further.

Also if you would like some tips on how to improve your credit score, contact us by email or call 02 8095 9251 for more information.

And finally, if you find these blogs informative, you can sign up to our newsletter at Newsletter to receive further information by email on a regular basis.

PROPERTIES SELLING PRIOR TO AUCTION

An award-winning property auctioneer  has credited mortgage brokers with contributing to his success by helping buyers be in a position to bid unconditionally at auctions (ref: Star-Auctioneer). With many properties selling before auction, it’s buyers that have their finance in place that are best placed to make an offer.  If you would like to be in a position to secure your dream home or next investment property, contact Golden Eggs Home Loans today on info@goldeneggs.info or 02 8095 9251.

Are you an ANZ Customer?

You may have seen in the news that ANZ Bank has overcharged some home loan customers for interest repayments, and so are providing refunds where this has been the case. The bank says it is contacting customers around the country offering them an average refund of around $300, after errors that in some cases date back to 2003.

ANZ Bank is conducting a review of all accounts to ensure they are operating correctly. Impacted customers will be notified either by mail, phone or on their bank statement and will receive their refund between 20 January and March 2014.

The bank has set up a specialist call centre team to manage customer enquiries in relation to the program, so feel free to call 1800 602 843 (8am to 8pm (AEST), Monday to Friday) if you think you may have been affected. Also feel free to let us know if you have any questions.