Fixed Rates and Rate Lock
In March this year there was an upward movement made to the Commonwealth Bank’s four and five year fixed home loan rates of approximately 0.20%. Since that time, several other lenders have also adjusted their fixed rates up for those terms. However, at the time of writing this article the one to three year rates fixed have remained steady and in many cases lenders are still offering rates below 2%.
That compares favourably with the low basic variable rates that are at present, generally half of 1% above that position. Whether now is the time to switch to a fixed rate or take a fixed rate on the purchase of a home, may become more clear over the coming six months. Remembering of course that the market generally turns before you make the decision. In other words its virtually impossible to pick the bottom or top of a rate cycle.
Here are several points to note that could influence your position to take a fixed rate loan:-
The Reserve Bank’s decision to slow down the treasury bond purchasing that it had been instigating to inject cash into the Australian economy. In other words, if the central bank (RBA) reduces available cash in the money markets it has the effect of increasing the cost of available money.
Signs of inflation in the economy, which once again places upward pressure on interest rates.
So now moving on from the above, but adding to the discussion on something which is interconnected, I’m now going to mention ‘Rate Lock’.
‘Rate Lock’ is a protection mechanism available to a customer that is applying for a fixed rate home loan and who would like to have certainty they will obtain the fixed rate on offer at the time, and not in say five weeks, when a property purchase or refinance might actually settle. The reason why, is because in that five/six week window that I use in this example, there is a risk that the fixed rate on offer may rise.
To protect themselves a customer can pay a premium, usually up to 0.20% of the fixed loan amount eg: $500000 fixed loan amount (x) 0.20% = $1000. That’s a once off premium and usually paid on loan application or sometimes full loan approval. If the loan doesn’t proceed to full approval the rate lock fee is refunded. It’s also important to note that once the loan is fully approved and the premium is paid, if on settlement external fixed rates have fallen , in the vast majority of occasions you will not receive the lower rate at the time of settlement. It is regarded as protection against fixed rate rises only . There are some lenders that do take the position of allowing the customer to get the lower rate on offer in these circumstances, but they are few and far between.
Something for customers to think about , but of course each individuals’ circumstances are different and it’s not all just about chasing a lower rate. Selling an asset or paying more off debt at a much faster rate etc, can mean that flexibility in variable rates are more in line with a client’s best interest at the time. Of course there is an opportunity always for customers to take an each way bet at no additional cost, considering a part fixed and part variable option.
You can phone (02 6583 2211) or email Michael to discuss this or any general commercial or residential home lending need.