The rush to fixed-rate home loans

Given the financial volatility in recent months, it makes sense that borrowers are seeking to reduce risk when it comes to their home loan. Fortunately, at the same time we’re seeing fixed rates lower than they’ve been for years, so it’s no wonder there’s a rush to fixed rate home loans.

In recent years, many Australians have seen fixed-rate home loans as being risky, explains Homeloans national marketing manager, Will Keall.

“Some borrowers fear being stuck on a fixed-rate while variable rates fall, more than they fear being subject to interest rate hikes on a variable-rate home loan,” Keall says.

“However, when factoring mortgage repayments into your monthly budget, the only way to be assured that your repayments won’t increase is to fix. Many would argue, therefore, that a variable-rate loan is the risky option.”

Typically, fixed-rate home loans offer a fixed-rate term of between one and five years, after which time the loan will revert to the standard variable rate at the time.

Keall refers to fixed rate home loans as “potentially a sensible choice for some borrowers” in times of economic uncertainty.

“In recent months we’ve had very varied views from economists on where interest rates are headed. At the end of the day, no one really knows, so the only way to provide assurance of your monthly loan repayments over the next few years is to opt for a fixed rate home loan,” he says.

Further adding to the argument towards fixed-rate mortgages is the fact that many lenders, including Homeloans, have recently reduced their fixed rates.

“We now have one, two and three-year fixed-rate home loans at well below our cheapest variable rate,” says Keall.

Australian borrowers seem to be seeing the merit in fixed-rate home loans. In fact, there has been a 75% increase in the portion of the number of dwellings financed with a fixed loan in the 12 months to July 2011. (source ABS)

As well as seeing an increase in fixed-rate loans, Homeloans is also experiencing demand in split home loans – where borrowers fix a portion of their loan and leave the remainder at the variable rate.

“If home owners are apprehensive about a perceived risk in fixing their loan, then a split loan may be a safe middle ground,” adds Keall.

Keall advises that for borrowers who want to maintain their repayments at a constant level in their monthly budget, a fixed rate home loan may be appropriate; however, they should carefully consider their options.

“A fixed rate home loan could be considered, but it is important to make the decision to fix in accordance with your personal financial situation and not to try to predict what the market will do,” Keall says.

“Borrowers should consider the terms and conditions that prevail during a fixed rate period, such as whether or not extra repayments can be made , plus and break costs if you discharge your loan early. It is important to ensure that you fully understand how it will affect your financial situation."

Homeloans has one, two and three-year-fixed rates at 6.59%*. See Homeloans’ fixed interest rates here.

If you would like an obligation-free discussion with a Homeloans consultant about fixed rate home loans, please contact us.

The material presented in this article is for general purposes only and does not take into account any individual’s financial circumstances, needs or objectives. All Homeloans loans are subject to lending criteria, terms and conditions. We recommend that you speak to an independent financial adviser before making decisions about your financial situation.*Rates effective 12 September 2011, and subject to change without notice. Click here for Homeloans interest rates table.

Top 10 Saving Tips

As many Australians are choosing to save in the current economic environment, we’ve pulled together our top tips on saving. So whether you’re saving for a deposit on a house, renovations, a holiday, a new car, or just for a rainy day, we hope that you’ll find these useful.

1. Draw up a budget setting out your income and expenses and have a financial plan.
2. Reduce your credit cards usage - credit cards can distract you from a savings plan so keep credit card debt to a minimum.
3. Spend less than you earn - Spend less than you earn is the secret to creating wealth. You won’t get there unless you stick to this one!
4. Try and find something to give up. This one can be tough, but whether it’s the daily coffee, a drink after work, buying your lunch every day, or something else, if you can save small amounts of money on a regular basis it all adds up!
5. Never invest money you cannot afford to lose.
6. Set up an emergency fund - Should be equivalent to approximately two months of expenses and gives you the flexibility in uncertain times.
7. Keeping a money diary to record your spending – Doesn’t work for everyone but it might be a good start if you’re not sure where your money is actually going. Even if it’s for just one month, it could be just enough to identify the little things that are costing you a fortune.
8. Set goals – key to financial success. This is the fun part. Set yourselves incentives for achieving your monthly or fortnightly budget. It’s no fun putting all your money into savings if there is no reward for hard work. What’s your goal? Is it a deposit for your own home, or a holiday with your family? This is what will keep you focused.
9. Don’t gamble. Many of us are tempted by the dream of winning millions, or thousands, or hundreds, but the reality is the odds are stacked against you.
10. Commit to change. The process of getting back on track with your finances can take years and there will be some compromises that have to be made. If you are dedicated and diligent, you will reach your goal.

If the purpose of you saving is to buy property, it may be valuable for you to know that lenders and mortgage insurers are very strict in what they consider savings. For example, they don’t see the repayment of an existing debt as savings, unless you can prove that you made accelerated repayments, and then it’s only those additional repayments can be considered as savings.

Additionally, savings in non-market assets won’t work in your favour either – this goes for savings under the bed, savings invested in cars or consumer goods - this is seen as spending not savings.

Finally, lenders and mortgage Insurers will want to see your deposit grow over a minimum period of six months.

So good luck and happy saving toward that ultimate goal of purchasing your our Home!
See more tips on obtaining finance.