Fixed Home Loans

Fixed home loans still worth considering The likelihood of another interest rate rise has once again caused home loan borrowers to consider whether switching to a fixed rate loan is the way the go. With the consensus view tipping a 0.25 percentage point rise when the Reserve Bank board meets in early April, it makes sense to look at what deals are on offer. While that short window of opportunity, where a number of fixed rates were much more attractive than variable rates has disappeared, there are still good deals to be found. And if certainty of payments is what is important to you, a fixed rate should be considered. The November rate interest increase has led to most rates on standard variable loans now being above 7.25 per cent, with most of the major banks around 8.07 per cent. While fixed loans don't suit everyone, there are plenty of fixed rates still on offer below 7.5 per cent for periods of one to five years. While switching costs and loan flexibility must be taken into account, fixing at least part, or even all, of the home loan should be considered by those feeling the mortgage pinch in the current climate. Intense competition in three-year rates sees many available for between 6.92 and 8 with many being offered at 7.35 per cent. The best 1- and 2-year rates currently start at around 6.95 per cent. The best 4- and 5-year fixed rates start at 6.89 per cent with many being offered at 7.45 per cent. Competition continues While rates may increase shortly, there is still high competition in fixed rates these days and significant variation in the market. Check out both bank and non-bank loans. It certainly pays to shop around with up to 1 whole percentage point difference at any one time between rates for a given fixed period. That's $125 a month difference in repayments on a $200,000 loan. Homepath, for example, is currently offering one of the best fixed rates in the market at 7.09 per cent for two years. While the lowest variable rate is 6.83 per cent from Advantage Finance, a slightly higher percentage rate may be acceptable to those looking to lock in certainty. Homepath's rate also compares very favourably with the highest 2-year fixed rate which is 8.02 per cent. Check loan flexibility Fixed rate loans won't suit all borrowers. Restrictions on extra repayments and early payout attached to some fixed rate loans can prevent you paying off your loan as quick as you might like, but flexible fixed loans are around for those who look, and they are becoming more flexible everyday. There is also the cost of switching to consider - charges vary but they can outweigh any savings on the rate. Remember too that fixed rates usually mean committing to an interest rate for a period beyond anyone's ability to predict rate movements. Trying to pick whether fixed or variable rate borrowers are going to come out ahead over this time period is always a gamble. However, the chances of the gamble coming out in favour of fixed borrowers is currently better than it perhaps has been for more than a decade. A decision to fix does at the very least offer insurance against variable rises that might extend repayments beyond the limit of your finances. For those who value the certainty of knowing just what their repayments are going to be over the next couple of years, it may well be better to lock in now. Property investors and owner-occupiers on a tight budget, for example. And for those borrowers not in a position to make extra repayments or not likely to pay out their loan during the fixed term, fixing is attractive. Reverse mortgages explained A number of lenders now offer "reverse mortgage" loans for retired people who own their own home but have little cash to live on. They are termed "reverse mortgages" because instead of borrowing money to buy a home, borrowers are using the home that they already own to secure borrowing to spend elsewhere. This style of loan allows the 'cash poor, asset rich' to create a cash flow out of the equity built up in their home, without having to sell it. The beauty of the arrangement is that you can generate money to live on and still remain in your house. No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death or sale of the home when they decide to move. Being able to tap into the equity in your home allows you to purchase goods you may have had to do without through lack of funds. For example, a new car, holiday or even to pay for house repairs. This is especially beneficial if you do not have many assets outside the family home to draw on to pay for these. However, there are plenty of issues to consider before you decide to sign up. Eroding the value of your home While the concept of a reverse mortgage is tempting they are not for everyone. Although borrowings are limited to a small proportion of the overall value of the home, borrowers should realise that unless the rate of growth in property values is high, the borrower will see their equity in the asset being eroded each year, leaving less available to pass on in their will. Interest is capitalised onto the loan and builds up each year so that eventually the debt amounts to a lot more than the original loan. For example, someone borrowing $100,000 at 8 per cent will owe $220,000 in interest and principal after 10 years, plus any fees. While repayment is not required by the borrower while they remain alive and living in the home, it must be repaid eventually, usually out of the estate upon death. What about the children? One thing to consider - if it is important to you - is that you will have fewer assets to leave to your children. Unless you sell your property and pay back the loan prior to your death, the beneficiaries of your will may be left with a property that has an outstanding loan secured against it. This may come as a shock if it wasn't expected, and your beneficiaries may find it difficult to deal with this as well as the grief of your death. How the economy affects your reverse mortgageReverse mortgages work best when property prices are rising fast and interest rates are low. Australians certainly enjoyed these conditions from 2001 until 2003 and many reverse mortgage borrowers saw the value of their home rising faster than their debt - tapping into the mortgage didn't see their equity being eroded. However, the housing market since has changed markedly. House prices have been flat or falling in some areas while interest rates have climbed. There could be more rises in store and the property market is expected to remain subdued for the next few years. In the worst case scenario, if the value of your home drops there may not be enough equity there to cover the loan plus the repayments when the borrower dies, or decides to sell. Depending on the terms of the loan, when the loan term is up you or your beneficiaries may have to find extra money to fund the debt, although this is becoming less common. Beware property investment seminarsThe housing boom brought an array of spruikers to property investment pushing dubious "wealth creation" seminars. Promoting their service under an "educational" guise, they often advertise free seminars but then demand high fees for further instruction. They also earn lucrative commissions as agents for property developers whose projects they ultimately recommend, and collect again from a stake in the loans offered to investors to finance their purchases. Queensland property, mainly the Gold Coast, has long been the focus of these marketing schemes but Sydney, Melbourne and now Auckland in New Zealand have also been aggressively marketed. The Australian Securities & Investments Securities warns anyone going along to a seminar believing they are getting advice that it is often a "product push" they receive. The investment "secrets" offered can involve buying multiple properties at once, often apartments off the plan. This often requires a heavy borrowing commitment and inflated prices. There is also an emphasis on deposit bonds which remove the need to stump up a full deposit until settlement. Sharper operators advise selling one or all of the property assets before settlement for a quick profit or to fund further investment. Macquarie Bank has published a guide on how to avoid risking money in fraudulent property schemes - "Plain English Dos and Don'ts for Property Investment". A spokeswoman for Macquarie said that people often buy Gold Coast properties off the plan and the developments sometimes don't exist - and the scam is continuing. We can't repeat the message often enough, she said.