Money

To fix or not to fix?

PRIOR to the Reserve Bank rate cut in early May, demand for fixed rate loans hit a four year high with around 15% of new loans involving a fixed rate.

It's too early to say how the recent rate cut will impact demand for fixed rates, but the current uncertain interest rate environment makes it essential to think carefully before you fix.
  
Fixed rate loans offer several pluses. The payments are set in cement for the nominated term so you don't need to worry about the impact of possible future rate hikes.  If you're on a tight budget where even a small rate rise could see you struggle to meet repayments, fixing can be a sensible option.

In addition, fixed rate loans are becoming more flexible. Some permit up to $10,000 a year in extra payments, and paying a bit more each month is a great way to save on interest costs and pay off the loan sooner.

Adding to their appeal, fixed rate loans have become very competitive over recent months, with some lenders charging below 6.0%. However the Reserve Bank's latest interest rate cut has filtered down to variable loans, and in many cases there isn't much difference between the two options.

Checking out some of the cheapest variable rate mortgages available, Loans.com.au is charging 5.85%, while refinancers can access low rates through the likes of UBank (5.83%) and bankmecu (5.91%). By comparison, you can lock into a one year fixed rate of 5.85% through Homestar, or 5.94% with Greater Building Society.

Fixed loans do have a couple of pitfalls though, and one of these is the possibility of higher fees. That's why it pays to look at a loan's comparison rate - also known as the AAPR or 'true rate'. This includes most upfront and ongoing fees, and provides a better picture of the real cost of a mortgage.

Another downside of fixed rate loans is the potential to be slugged with break charges. These are quite different from exit fees, which have been banned on new loans taken out after 1 July 2011. This ban is designed to make it easier to refinance a variable rate loan if a better deal comes along. Despite the exit fee ban, break costs can still apply to fixed rate loans.

Exactly how much you could pay hinges chiefly on how market rates have moved since you locked in to a fixed rate. If rates have risen, you may not be charged a break cost at all. But if market rates have fallen below your fixed rate, break costs are likely to apply. These are often calculated based on the difference between your rate and market rates, multiplied by both the outstanding loan balance and the years remaining in the fixed term - the final cost can add up to thousands of dollars.

If you're thinking about locking in your home loan interest rate, it can pay to choose a shorter fixed term. The longer the term, the greater the likelihood that market rates will move against you. An alternative is to split your loan between fixed and variable rate portions. This offers the flexibility of a variable rate plus the certainty of a fixed rate.

For more ideas on choosing between fixed and variable rates take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

Topics:  mortgages opinion paul clitheroe rba



How to survive a bushfire in your car

IT SOUNDS like a nightmare, but it can happen.

Eight reasons to join the RFS

SPREAD across 93% of Queensland, the Rural Fire Service has about 36,000 volunteers. And you could be one of them.

What if my insurer gives me grief?

CLAIMING your insurance cover after a natural disaster can go one of two ways. It can be a breeze, or like pulling teeth.

100 jobs by Christmas challenge earns government praise

Employment Minister Grace Grace applauds Warwick businessman's challenge.

State Government praise for Warwick businessman's challenge.

Warwick business owners are taking the challenge

No Caption

A couple of Warwick businesses are already right behind the plan.

Wagners challenge $235m rail transfer hub InterlinkSQ

The prize is the lucrative inland rail freight business

Local Partners

Businesses challenged to find 100 youth jobs by Christmas

IN THIS, the season of giving, a businessman is challenging business leaders to deliver 100 jobs to unemployed young people for Christmas.


Don't miss the free Bunnings Christmas party

Free Bunnings Christmas Family Night

WARWICK'S Bunnings Warehouse will come alive tonight for Xmas

Rose City unites in festive event

Erin and Keely Hilton.

Local performers entertain at Carols in the Park

Safe fun in the water at WIRAC

SWIM STAR: Zac Sorenson having a ball at the GH Foundation Warwick Aquatic Participation Day for adults with a disability.

WIRAC is holding a GH Foundation Aquatic Participation Day today

Walk in artistic expertise

Local artist, Franco Arcidiacono preparing for the Floor Walk.

Journey through exhibition a special opportunity.

Brad Pitt bids to keep custody battle private

Brad Pitt will go to court to keep his custody battle private

Sia has split from her husband

Sia has split from her husband Erik Anders Lang.

Amy Schumer thanks Barbie trolls for hateful comments

Amy Schumer is in the lead role for the new Barbie movie

Shannen Doherty's husband is suing for destroyed sex life

Shannen Doherty's husband is suing her former manager

Azealia Banks' battery case against Russell Crowe dropped

Russell Crowe will not be charged with battery

Ipswich City Properties asset portfolio retains its value

Ipswich City Council Administration Building, South Street, Ipswich. Photo: Claudia Baxter / The Queensland Times

New website launched by Ipswich City Council

All I want for Xmas is a property bargain

$259,000, 13 Guy Street, Warwick. A block from Warwick's CBD, this graceful character home has three bedrooms and a study.

Ring in Christmas with one of these property bargains under $300,000

INSIDE STORY: The highlights of your $150 million CBD

GRAND PLAN: The highlights of the Ipswich CBD redevelopment and where they will be located.

Work on city heart's radical transformation to begin next year

VOTE IN OUR POLL: Sand mine opponents face serious dilemma

Public meeting for the proposed sand mine at Maroochydore last week.

Coast MP calls on Minister to stop KRA proposal with stroke of a pen

Developer's grand new multi-million dollar estate

NEW ESTATE: This is the only plan revealed by the property developer's new Billabongs Estate in Agnes Water.

DEVELOPER given the go ahead for a massive estate with 149 homes.

Ready to SELL your property?

Post Your Ad Here!