Before going into a fixed rate home loan, it’s worth thinking about the implications should you decide to ‘break’ the loan at a later date.
During 2008, the RBA cash rate skyrocketed up to 7.25% and in order to protect themselves from further rate increases, many borrowers decided to lock into a fixed rate home loan. But unfortunately, the RBA cash rate steadily declined to a 53 year record low of 2.50%. So, many fixed rate mortgage holders were paying well above what variable rate mortgage holders are paying until their fixed rate expired.
A fixed rate home loan can provide borrowers with security and stability as you will know exactly what your repayments will be during the fixed rate period. However, there are certain restrictions that make the loan less flexible. Some fixed rate home loans don’t allow extra repayments and may also have expensive break costs. There are several ways that you can ‘break’ a fixed rate home loan and these may include:
• Refinancing to a different home loan, for example if variable rates fell dramatically below your fixed rate
• Making extra repayments beyond what is allowed while the rate is fixed
• Repaying the loan in full before the end of the fixed term. Either due to a windfall or having to sell the property as your plans have changed
Different lenders may have different regulations in regards break fees, so before you decide to apply for a fixed rate home loan, you need to make sure you speak with your lender about what warrants a break fee. You may find that there is a certain amount of extra repayments you are allowed to make each year without being charged. Also be aware that lenders may have different names for break costs, so just because you can’t see the words ‘break costs’ doesn’t mean they don’t have them.
Some borrowers with fixed rates, refinance to a variable rate loan as they believe they will save money with the lower interest rate. But, they forget to include the break fees when doing their calculations. Break fees can equate to thousands of extra dollars which may very well outweigh the benefits of refinancing. For example, if you fixed a home loan at 8% with less than a year left on your fixed rate period and the current variable rate is at around 6%, you may consider refinancing. However, since you only have less than a year left of higher interest rates, the additional break fees may cost more than what you would pay with the higher rate.
Breaking a fixed rate home loan is not always easy and can be expensive, so before you lock your rate, think carefully about your motivation for wanting to fix in the first place.