Are You on a Fixed Rate and Not Happy with It?
The RBA has just cut the official cash rate by 0.25%, which takes it to a new record low of 0.75%. Whilst this is stirring a wave of relief for some borrowers, not everyone is happy with this news.
Having a fixed-rate mortgage can be frustrating if the interest rates are dropping. Even a tiny drop can add up to tens of thousands of dollars in savings.
If you’re feeling like you made the wrong choice, it’s entirely normal. The good news is that you can take action to change it. Learn more about how fixed rates work and what refinancing can mean to your wallet.
What You Need to Know about Fixed Rate Mortgage
A fixed-rate home loan is one that stays the same for a certain amount of time no matter what. Typically, fixed rates will last for one, three, or five years at a time. Once that time period is up, the loan will revert to a standard variable rate.
The Pros of Fixed Rate Mortgage
One of the biggest reasons why people choose fixed over variable is consistency. If the rate rises for any reason, it gives you the peace of mind because it won’t affect you. An owner who makes a certain amount of money every month isn’t going to want to deal with a possible increase in their rates and in turn repayments.
If the rate continues to rise, a property owner could end up spending far more than they ever imagined on their home. While some people do experience decreasing rates in their favour, this technique feels a little too much like gambling for those who would prefer to map out a budget well in advance.
The Cons of Fixed Rate Mortgage
While a fixed rate can protect you when interest rates increase, it can also mean that if the rate drops during the fixed period, you won’t benefit from it.
Some lenders may charge a fee to make additional repayments, or they may prevent you from paying over a certain amount. Similarly, you won’t have access to redraw or offset facilities should you need them.
Fixed-rate mortgages are also more difficult to cancel or change. Lenders will charge you a break fee if you want to pay off your loan within the fixed-rate time period.
How Refinancing Can Help
Refinancing is when you pay off your current loan and then take on a new one with better terms.
This strategy can be done through our service, our team can switch your allegiance to a competing lender. With this strategy, you get rid of your relatively high-interest fixed-rate loan in favour of what could be some extreme savings.
If you decide to refinance your home loan before the end of the fixed term, you will be paying for break costs. It’s also important to remember that breaking a fixed loan and refinancing to a lower rate can be worthwhile as the savings in interest on the lower rate can outweigh the break fee on the fixed loan.
Why would you want to refinance?
Home interest payments are at the core of your property, and unfortunately, the numbers are not necessarily working out in your favour.
In fact, Australians are wasting $4.2 billion in home interest repayments simply because they’re not looking for anything else. Many people don’t even know what their interest rate is. Considering it accounts for so much of your monthly income, it’s probably time to take another look at what refinancing can do.
It’s easy to see why people don’t make more of an effort when it comes to managing their loan. It’s much easier to let the mortgage ride for years on end, especially when you’re busy trying to budget for other more immediate matters.
But lenders are constantly introducing more products into their businesses, and they’re unlikely to tell you about them if it’s going to lower your interest rate and increase your equity. It’s on the owner to learn about these opportunities so they don’t fall behind.
This doesn’t necessarily mean that homeowners need to refinance their home every year. But it may make sense to look now that rates are predicted to come down. It’s clear that too few people are exploring these options, and it’s ultimately resulting in a lot of dollars down the drain.
When is refinancing wrong for me?
As nice as refinancing sounds, it’s not always the right solution. As mentioned, fixed-rate mortgages come with a break fee if you want to cancel them. This fee can be substantial and may or may not cover the savings you’re likely to get on your new loan.
In addition, there’s no guarantee that rates will go down or stay the same. People who opt for fixed-rate mortgages are people who don’t necessarily want to assume a lot of risk. Just the threat of having a rate increase hanging over your head can be enough to rule out refinancing.
Refinancing can potentially save thousands of dollars on your repayments, and it’s almost certainly worth looking into.
If you’re looking to cut through the jargon, Shore Financial can help. We have access to more than 30 lenders and hundreds of products, making it simple to find the best loan for you. If you want to take action today, give us a call to see how we can help.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.