A fixed rate home loan may end up costing you more.
Although a popular option among borrowers, fixed home loans can actually end up costing you thousands of dollars extra in high interest rate charges. Fixed rate home loans can offer you the security you need for a long term loan, but for some loans, after the fixed period ends the interest rate reverts to a rate as much as 1.01 percentage points higher.
Statistics have revealed that more borrowers are choosing to fix their home loan rates. Data from the Australian Bureau of Statistics (ABS) shows that 92,251 fixed home loans were financed in the past 12 months to August 2013, which was 29,122 more than the previous year.
The average proportion of borrowers fixing their loans was 16% for this same time period, compared to 12% the year prior.
Compare the rates
If we take a look at rates in October 2013, the average three year fixed rate was 5.07% which reverted to 5.51% after the fixed period ended. There are several three year fixed loans that revert to higher than this—up to 6.19%. This includes all four of the major banks.
Compared to July 2011, before fixed loans began to fall, the average three year fixed rate of 7.38% was almost the same as the average revert rate of 7.41%. Revert rates for three year fixed home loans ranged up to 0.70 percentage points higher.
For instance, let’s take a typical $300,000 mortgage over 30 years with the average three year fixed home loan of 5.07 percent reverting to 5.51%. The extra cost after the fixed period would be about $81 per month. Over the remaining loan term of 27 years following the fixed period, this extra cost is potentially over $26,000.
Three year fixed rates and their revert rates
|Average 3-year fixed rate||Average 3-year fixed revert rate||Difference|
Fixed home loan rate offers
Now more than ever borrowers need to be wary of attractive fixed loan offers as more are expected to lock in their rates. Fixed loans are great in that your repayments will remain the same during the fixed term, particularly when there’s talk of rising interest rates on the horizon following the latest inflation figures. And there are some very good value deals currently being offered, with three year fixed rates starting low. Keep in mind that fixed rate home loans are not necessarily the best value over a 30 year loan term if the revert rate is much higher.
Comparison of variable rate home loans
How to avoid being ripped off
The best way to avoid being ripped off with a fixed home loan is by comparing home loans before your fixed term ends and renegotiate with your lender or switch to a better deal. If you fixed your loan at the fixed rate of 5.07% and switched after three years to one of the lowest variable rates available you could save a considerable amount on your monthly repayments. For example, if you switched to a variable home loan with a rate of 4.59%, you could save $168 in monthly repayments compared to the average revert rate of 5.51%. Over the remaining loan term that’s a saving of over $54,000.