With the Reserve Bank's cash rate cuts this year driving fixed interest rates on home loans down to historic lows, experts are warning borrowers about break fees.
A break fee is a charge borrowers face if they exit a fixed home loan early, and is usually a calculation based on the lender's wholesale funding rate at the time of the fix, and now.
The larger the difference between the wholesale funding rates, the larger the break fee is likely to be.
However, following multiple cash rate cuts down to a historic low of 0.25% in March, what was once a good rate only a year ago might now be mediocre, and the temptation to break out of a fixed loan is strong, according to the experts.
Pure Finance managing director Brendan Dixon has seen a wide range of break fees with borrowers chasing a better deal.
“We’ve seen break fees ranging from a few thousand up to $35,000,” he said.
“The $35,000 example was someone who fixed for five years at 3.70%. At the time, it was a fantastic deal for the customers who were attracted to the low interest rate over a long period.
“The world changed since then, and now fixed rates are as low as 2.19%.
“When this fee was compared to the potential savings possible with the new product, it didn’t make sense to pay the break fee."
Due to the severity of the rate cuts, the cost of breaking the fixed term might not be as much as the potential savings by refinancing, but borrowers will have to do their homework, according to Mr Dixon.
"Conversely, some customers who are approaching the end of their fixed term might have a small fee payable which is counteracted by the savings of switching, and so it makes financial sense to pay the fee," he said.
"The fixed loan is a two-way agreement between you and the bank. They will give you the rate you desire but you have to stay in the product for the term.
"Right now we are helping a lot of clients to assess the benefit of fixing and often clients are seeing the benefit."
Buying a home or looking to refinance? The table below features home loans with some of the lowest fixed interest rates on the market for owner occupiers.
Base criteria of: a $400,000 loan amount, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the product provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 August 2020. View disclaimer.
Is fixing a home loan a good idea?
Experts generally opine that fixing is a good idea for some, and a not so good idea for others.
Mr Dixon says borrowers will have to assess their own situation before fixing their rate.
“The main consideration with fixing a home loan is ensuring you avoid a future break fee, because this defeats the purpose of taking the lower rate,” he said.
“The other consideration is that with most fixed loans, not all though, you can’t make too many additional repayments and you also can’t have a linked offset.
Although, a more flexible arrangement might be to fix a portion of a home loan, according to Mr Dixon.
“If your goal is to knock your loan down in record time then a fixed loan may not be for you,” he said.
“With clients that have this goal, we might recommend a split loan which is where you fix a portion of your loan (say, 70%) and then leave the rest as variable.
“That way, you can make extra repayments on the variable loan (and have an offset if you like) whilst also making the most of low fixed rates for the bulk of your debt.”
Co-founder of Atelier Wealth, Aaron Christie-David, also pointed out some of the restrictions of fixed rates.
“Yes, rates are low, however most borrowers are unaware that a fixed rate loan can be restrictive, for example, max $10,000 in additional repayments per annum, no offset account linked, [and] break fees,” he said.
With fixed rates now commonly lower than variable ones, Samuel Philipos from the Benevolence Financial Group says fixing could provide certainty and a way to reduce expenses.
“A silver lining during these troubled times is saving borrowers thousands of dollars on their home loan,” he said.
“During the global pandemic, it would be wise to look at reducing expenses particularly with the largest household expense: your mortgage.”
Mr Dixon said fixing could be a good idea, provided it suits borrowers' longer term goals.
"There is a big gap between fixed and variable at the moment and this is because of the two rate cuts in March when the banks passed on one rate cut to all variable and fixed loans, but the second cut was only passed on to fixed loans, as well as an increase to term deposit rates," he said.
"This means that fixed loans got a double reduction in March and this triggered mass competition between the banks to secure clients.
"Banks are nervous and need customers right now."
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 August 2020. View disclaimer.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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