01.Big banks not offering bang for your buck
Despite three of the big four banks cutting their fixed home loan interest rates in the past week, they are not offering the lowest rates when it comes to five-year fixed home loan interest rates, with up-and-comer ME Bank providing borrowers with better value.
Fixed rate loans are currently at historic lows, with ME Bank joining CBA, Westpac and NAB in a rush to the bottom as a result of lower funding costs.
Is now a good time to lock in your mortgage interest rate?
Whether now is the best time to lock in your mortgage interest rate is up for debate. Predictably, Luke Easton from ME Bank says it is. "Now is a great time to fix your home loan, with variable rates not expected to go much lower – we’re either at or very close to the bottom of the current interest rate cycle."
But Phil Naylor, CEO of the Mortgage & Finance Association of Australia, cautions borrowers against making an uninformed choice. “It’s an individual decision, I would not be doing it without some advice.” Some economists are reportedly predicting that rates will fall further. And financial counsellors at the Consumer Action Law Centre warn borrowers against the potential pitfalls of fixed home loans.
Potential pitfalls of a fixed rate home loan
A fixed rate home loan isn't for everyone - borrowers have to pay for the certainty fixed rate loans offer by giving up a lot of the flexibility of variable rate home loans. Naylor says some fixed rate home loans don't allow you to pay off your loan early, prevent you from making additional repayments, and penalise you with large fees if you do. The penalties can range into the thousands of dollars, depending on the time left on the fixed loan and the interest rate climate of the time.
So it's very important to check the features carefully before signing up for a fixed loan. The big banks and ME Bank all allow some extra repayments without penalties during the fixed rate period, but the amounts vary.
What to look for in a fixed rate home loan
- 100% offset account – offered by Adelaide Bank, for example.
- Extra loan repayments without penalty – check exactly what limits apply.
- Low fees - look at the "comparison rate" to compare home loan rates.
- The option to substitute the security (home) without paying break fees. This is important if you think you may want to sell during the fixed period.
Tip: Consider a split loan – part of your loan on a variable interest rate and part on a fixed rate. You can make extra repayments into the variable portion of the mortgage.
|Fixed home loan deals
|| 3-year comparison rate(%)*
||5-year comparison rate(%)*
Note: Rates based on a packaged loan. The major banks offer a rate discount to customers on a home loan package; ME Bank offers the same nominal rate for standard and packaged home loans.
*Comparison rate for a packaged loan of $150,000 over 25 years. Comparison rates for standard loans differ.
For more on mortgages, see CHOICE's money section.