Fixed rate can jump start wealth
NEGOTIATING a home loan with a fixed interest rate can give you a jump-start in building wealth, regardless of whether you're an investor or a home buyer.
Competition among mortgage lenders is strongest in the fixed-rate home loan sector and, provided you keep an eagle eye on shifts in the loan market, you can exploit the current state of play to your advantage.
The wider the gap between the variable interest rate and the prevailing fixed rates, the more it makes sense to fix at least part of your loan.
The chances of the tactic backfiring diminish when the variable rate is significantly higher than fixed rates.
Since January, many lenders have cut their one-year and three-year fixed rates.
Members Equity Bank and RAMS have both reduced their one-year fixed-rate home loans by 40 basis points to 4.99 per cent a year.
RAMS's parent bank Westpac has cut its two-year fixed-rate home loan also to 4.99% as the banking group tries to lock in new customers.
ME Bank's group executive of sales, Ian Hendey, says fixed loans traditionally account for about 15% of Australian home loans.
In the last quarter of 2012 the market share of fixed-rate loans exceeded 20%, and dropped back to 16% in January.
But Mr Hendey expects demand for fixed loans to lift again because of February's decision by the Reserve Bank to leave the cash rate unchanged.
In addition, current offers for fixed loans are the lowest seen for 20 years, he says.
'"The gap between fixed and variable rates is probably as wide as it has ever been," he said.
"Therefore you have got to see the variable rate come down a long way before you actually start to lose money by locking in at a fixed rate."
The lowest three-year fixed rates are a little less than 5.2%, compared with a variable rate of about 5.8% that most pay.
Lenders compete more keenly on fixed rates because they frequently hang on to fixed-loan customers for the long term.
If you're tempted by a fixed-rate mortgage, ask the lender if the fixed rate is guaranteed or whether it could change before the date of settlement.
Some lenders guarantee the interest rate on their fixed-rate mortgages for 90 days if the borrower pays a "lock-in" fee.
These fees are either fixed or a percentage of the loan balance and cost about $750 on a $300,000 mortgage.
Remember, too, that fixed-rate mortgages are not as flexible as variable-rate loans, even though many allow extra repayments.
You also run the risk that variable mortgage rates could fall, making them more attractive.
This is the main reason many borrowers opt for a 50-50 split between a fixed-rate and variable-rate mortgage.
According to the rate comparison website RateCity, fixed rates have been falling since mid-2011 and average fixed loan rates are now at the lowest levels ever recorded.
It says average four-year fixed rates have fallen by 190 basis points since mid-2011, while average standard variable rates have fallen by 133 basis points.
The new deals on fixed loans stem from sluggish demand for housing finance.
Bureau of Statistics figures show 43,885 home loans were financed nationally in December 2012, a drop of 10% on the same period the year before.
RateCity spokeswoman Michelle Hutchison says lenders are feeling the pressure of the slow mortgage market and are doing whatever it takes to attract new customers.