You may have heard of bankers and brokers spouting the concept of 'the house always wins', meaning I guess that, the banks have better modelling, enabling them to know how to price fixed rates so that they always come out on top! Rumours aside, the best thing is to inform yourselves as to what the benefits are and what the drawbacks are.
As mortgage brokers we don't advise on locking in rates or remaining on variable, but buyers should definitely consider the pros and cons. As mortgage brokers we CAN however provide you with options and a lot to think about....
Great for those on a budget seeking security, who cannot afford a hike in rates.
Stability in your budget, assuredness that your rate won’t increase (or decrease)
- A fixed rate can attract an early repayment penalty if you break out of it early via early repayment, sale, refinance. This fee is unascertainable until the rate is broken, as it will be based on wholesale market rates at that time. That's a very big IF! When the Rudd government legislated out "early repayment penalties" many people were mistakenly led to believe that fixed rate penalties would be waived also. Not true! So borrowers should exercise extreme caution and be committed to seeing the term of the fixed rate out. Different Lenders offer between 1and 15 year fixed rate terms.
- Most lenders do not have 100% offset accounts for fixed rate loans, so consider keeping some of your home loan on variable by splitting it, so that you can still use an offset account and park any savings somewhere.
- If the cash rate drops, you cannot simply switch out to a variable rate. The more the cash rate drops the higher your early repayment penalty could be.
The reserve bank has repeatedly announced more stability in the cash rate. The Sydney Futures Exchange long term yield curve currently pegs the market expectation to be one to two rate rises next year of 25bps.
What should we do!??!
A popular option we often find our first home buyers love is what we call a cocktail loan! Why not mix it all together a little if you want the best of both worlds...?
Also, you can look at asking your broker if the banks are negotiating on any fixed rates. Some lenders are currently in a little price war on the 2 year fixed rate, so the carded rate in the branch may not be the best you can get, always ask your broker!