Should I Fix My Home Loan?

Lean in. Come closer. If you promise to keep this under your hat, I’ll not only show you what to do with your home loan, but how you can save thousands of dollars on your repayments by using a little-known strategy that is bound to annoy the hell out of the mortgage industry.

Your biggest financial decision this year will likely be what you do with your home loan. After all, you’ve been warned.

Officially.

Late last week, Reserve Bank governor Glenn Stevens said he thought interest rates were below normal and would move “a good deal north” as the economy recovered.

Economists reckon Stevens’ compass is locked on to a 2 per cent increase by the middle of next year.

That translates to the average $300,000 mortgage holder coughing up an extra $375 a month. A fair whack given it will likely coincide with higher prices for goods and services.

The thing to remember is that no one really knows where long-term interest rates are going (during the last election Kev and his colleagues ended every question with the line “we’re committed to keeping downward pressure on interest rates” – the Global Financial Crisis has made a mockery of that).

Few people get it right. Case in point: most experts failed to predict the previous two periods of sharp rate increases. In 1994, rates jumped by 2 per cent in a matter of months, and between August 2007 and July 2008 interest rates on variable mortgages leapt 1.3 per cent.

Fix your rate

To guard against these rapid hikes, you may be thinking about locking in your current rate. Many of my banking mates have told me that six months ago they couldn’t sell a fixed rate for quids, yet now it’s all that most customers are talking about.

The best advice (especially for struggling people who have recently bought their first home) is to stress test your ability to repay – just like the banks do. Go to your bank’s website and work out what your repayments will be after you add a few percentage points to your rate.

A home loan is most people’s largest ongoing expense so it pays to ask uncomfortable questions. If the results show that you’d be seriously in trouble (an all-too-common issue for people who overextended themselves with the help of government largesse), fix your rate.

Don’t fix your home loan rate

For everyone else, switching to a fixed rate will most probably be the wrong move – because it’s too late.

The two main advantages of a fixed rate are knowing exactly how much you’ll have to repay, and potentially beating the banks (who can play funny buggers and jack up your rate without a lead from the RBA, as some have done over the past few years).

Yet this all comes at a cost. Think of a fixed rate as an insurance policy that you pay from day one. Right now mortgage researcher Infochoice’s benchmark variable rate sits at 5.24 per cent. After a scout around, we found that a competitive three-year fixed rate will cost you 6.65 per cent, while fixing for 10 years will cost upwards of 8.5 per cent.

Put simply, by taking a three-year fixed rate you are choosing to increase your interest costs by 27 per cent.

By spreading the insurance over 10 years you’ll increase your costs by 62 per cent – which you’ll start paying from day one! Also remember that after your fixed term ends, you revert back to a variable rate.

Now, if you’re still sitting on the fence about whether to fix your rate, a smart strategy would be to increase your repayments to what you’d be paying on a fixed rate deal.

This has a number of advantages – one of which is that you get to see how higher repayments will affect your household budgeting.

But even better, the extra repayments you make will compound and pay off your mortgage quicker – plus you’ll have built up a buffer should you hit tough times.

Guaranteed gains

Now, here’s how you can save thousands and pay your mortgage off quicker – regardless of which way rates go.

This week the Australian Securities and Investments Commission called for the banning of trailing commissions to financial planners. What most people don’t know is that a similar fee structure is paid to mortgage brokers.

I’ve copped a heap of criticism from brokers, who argue that they provide a free service because it’s the bank that pays them the fee, not the consumer.

They argue quite correctly that if a customer bypasses the broker and goes straight to the bank, they won’t get a better deal. Which is true.

That’s why when you next decide to refinance, it’s very important you pick the right mortgage broker.

Of the 12,000 registered brokers, only three brokerages will refund the kickbacks the banks pay them (the technical term is “mortgage rebates”). They are Peach Home Loans, Refund Home Loans and Mates Rates Mortgage Brokers.

Check two things

Just make sure you check these two things.

First, that the broker has a big panel of lenders that they source loans from, including all the big banks (a bigger lending panel means more choice). Second, that they set out how, and how much, you have to pay them – no one works for free.

Trailing commissions can end up costing you thousands of dollars, but if you go with a mortgage broker who kicks you back the kickbacks – and you pay them straight off your cut-rate variable mortgage – you’ll be in the box seat.

Use our tips to pay down your mortgage faster.

Tread your own path!