Short Term Fixed Rate Loans Might be OK Just Now

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Mortgage Broker Adelaide

Steve Greatrex

I rarely recommend fixed rate loans, especially longer term loans. Several years ago we had a 5 year fixed rate home loan. When we sold our home and went to repay the loan, Big Bank hit us with $25k in costs. But it seems to me that one or two year fixed rate loans might be worth considering at the moment.

The Reserve Bank’s cash rate is currently 0.25%. They have made it pretty clear that they won’t be reducing it much more and almost definitely won’t be doing negative interest rates (as some countries have). COVID-19 has arguably been about as bad as things could get and they are still stuck on 0.25%. The cash rate is not the only determinant of loan interest rates of course, but it can have an impact on the ‘yield curve’. Looking just now at a $500,000 home loan with 80% LVR (Loan to Valuation ratio), Principal and Interest owner occupied loan, I can see a variable rate of 2.55%. A fixed two year rate I can see a rate of 2.09%. That is a potential saving of $2,300 per annum if the rates don’t change.

Yes rates could change but if you limit your fixed rate loan to one or two years the downside should not be too bad. One thing to bear in mind is that you are limited in how much extra you can pay off the fixed rate loan – in this case the lender will allow you to pay an extra $10k per annum without penalty. Other lenders will allow as much as $30k per annum extra without penalty. You could manage this risk by splitting the loan.

The advantages of the fixed rate are certainty and (at the moment) lower cost. The disadvantages are possible exit fees, missing out on further falls in rates (which are historically low already) and limits on how much extra you can repay.

As always get some advice first.

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