RBA keeps cash rate on hold: Four traps with fixing home loans

The Reserve Bank of Australia has kept the cash rate on hold and many borrowers are rushing to lock in their interest rate.

Savvy borrowers chasing rock-bottom rates can snare dozens of deals below the “2” per cent mark, new analysis has revealed.

On Tuesday the Reserve Bank of Australia board kept the cash rate on hold for the second time in 2021 at 0.1 per cent.

The cash rate hasn’t budged since October last year.

Data from Mortgage Choice shows in the past year borrowers taking out fixed rate deals almost tripled from 13 to 33 per cent.

But while fixed rates deals are extremely competitive experts say there are four traps to watch out for before deciding to lock in your loan:

1) FLEXIBILITY

Canstar’s group executive of financial services Steve Mickenbecker says for those fixing it means you will lose flexibility.

“You’re often restricted in the amount of extra repayments you can make on your loan,” he says.

“The goal is to put as much money into your loan to get it down.”

Make sure you read the fine print or ask your broker or lender exactly how much extra in repayments you can pay each month. Rates, of course, may have gone up or down since you signed up to your fixed term.

2) BREAK COSTS

If you try to break the loan before the fixed rate period ends you will be hit with charges. This can run in thousands of dollars depending on the loan size and how early you exit.

“If you’re thinking of selling you shouldn’t fix your loan, or if you think there’s a reasonable chance you might sell,” Mickenbecker says. “You can get out of a loan early in most cases but there will be a cost to do this.”

3) CHANGING LENDERS

It is harder and more expensive to switch lenders during the fixed period, but if you can switch, fixing might get you a much cheaper deal.

Jacob Schwarcz, 29, and wife Tania, 30, have a $500,000 loan and recently switched lenders for the second time in just four years. They have gone for a split loan and have no plans to refinance or sell in the next two years.

Jacob Schwarcz and wife Tania have a $500,000 split loan. Pictures: Julian Andrews

The pair moved from the Commonwealth Bank to HSBC and are now paying a two-year fixed rate of 1.88 per cent on 80 per cent of their loan and a variable rate of 2.49 per cent on the remaining 20 per cent.

Their repayments have dropped by $500 per month. Schwarcz says the rock-bottom rates are what prompted them to switch and save.

“We did it because of the savings and the mortgage broker did all the work for us,” he says. “We don’t think rates will go any lower than 1.88 per cent so break costs was never a consideration.”

4) OFFSET AND REDRAW ACCOUNTS

An offset account – a daily transaction account linked to a mortgage and a redraw account when you can withdraw excess payments made are handy, but many fixed rate deals don’t allow customers to have either.

Despite this, Mortgage Choice broker Scott Partridge says, “there are some exceptions where you can get redraw and Adelaide Bank which has 100 per cent offset on their fixed rate”.

Offset accounts are very useful for focusing on reducing interest costs.

If you have a $500,000 loan and $10,000 sitting in an offset account you will only be charged interest on $490,000.

AT A GLANCE – THREE-YEAR FIXED RATE LOANS

($300,000, owner occupier 30-year principal and interest loan)

1. UBank, UHomeLoan Fixed, 1.75 per cent, $1072 monthly repayments.

2. RACQ Bank, Choices Residential Fixed, 1.89 per cent, $1092.

3. BankVic, Premium Home Fixed, 1.95 per cent, $1101.

AT A GLANCE – THREE-YEAR VARIABLE RATE LOANS

($300,000, owner occupier 30-year principal and interest loan)

1. Reduce Home Loans, Super Saver Variable, 1.99 per cent, $1107.

2. Loans.com.au, Smart Booster Home Loans, 1.99 per cent, $1107.

3. Illawara Credit Union, The Works Package, 1.99 per cent, $1107.

Source: canstar.com.au

Originally published as RBA keeps cash rate on hold: Four traps with fixing home loans