With so much interest rate uncertainty in the market, borrowers are facing a dilemma as to whether they should fix their home loan interest rate or not by applying for a fixed rate mortgage. A fixed rate mortgage will provide absolute security against interest rate rises ensuring that monthly repayments remain constant regardless of what the money market is doing.
The interest rate, and therefore the interest payments, on the fixed rate product will remain stable for the fixed rate period. This period is predetermined and is usually set between one and five years, although it can be for longer.
Fixing home loan repayments can help considerably with household budgeting which is why this type of product is popular with low income earners and first-time-buyers. Mortgage payments usually account for about a third of a household’s disposable income so it is important to ensure that rising interest rates do not make the home loan unaffordable. Locking in the interest rate at an acceptable level can reduce this risk considerably.
Borrowers should be aware, however, that fixed interest rates are usually higher than variable rates offered on the same products. Additionally, as a general rule, the longer the fixed rate period is, the higher the interest rate will be. This is because lenders must provide themselves with a profit margin on the money they lend. If they are expecting interest rates to increase in the future, their costs will increase and their profit margin will decrease.
Lenders therefore need to build in a larger profit margin for this type of home loan product when compared to variable rate products. Mortgage products that have a variable interest rate should provide a profit to the lender for the entire term of the loan. Borrowers should therefore keep in mind that they might pay over the odds for a fixed rate home loan however the reduction in risk should make up for this.
Another factor that borrowers should consider before applying for a home loan product of this kind is early repayment charges and arrangement fees. Although a fixed rate mortgage can save money over the long term if interest rates rise, borrowers should take into account any fees that may be payable on an existing home loan if it is redeemed and switched to a new product.
Additionally, fixed rate products may attract an arrangement fee. The cost of the arrangement fee should also be taken into account when calculating whether this type of home loan product is worth applying for. Also, home loan products typically come with early repayment charges during the fixed rate period. This means that if the borrower wishes to redeem the loan or remortgage to another product they will have to pay a fee to the lender. Early repayment charges can be as high as five percent of the balance of the loan.
If you are unsure on whether you should apply for a fixed rate home loan, contact a qualified independent financial advisor for expert advice. An independent advisor will be able to assess you borrowing needs and suggest the most appropriate mortgage products for you to consider for your home.
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