In the wake of multiple RBA rate cuts and many eager first home buyers, the mortgage market has been flooded by many fixed-rate home loans that offer incredibly low rates and large cashbacks. While many of these may seem to be the ultimate deal, borrowers need to exercise caution before opting for one of these products. Here’s a quick look at what you need to keep in mind before considering a 'fixed-rate mortgage' cashback offer.
The ability to pay in more
Many fixed rate offerings do not offer the flexibility to pay in more than the minimum repayment amount. Absence of this facility could significantly limit your savings and prospects of speeding up home ownership. Consider the following example.
Adrian is a first home buyer and has qualified for a $500,000 loan. A friend tells him about a great fixed rate deal, and he has his heart set on getting a home loan with a fixed rate of 1.99% fixed for four years. Sounds fantastic! Doesn't it? A closer look, however, reveals something more. To qualify for the loan, Adrian needs to demonstrate he can afford the mortgage against a test (or qualifying) rate - a rate that's higher than current rates. This test rate usually sits at around 5 – 5.5%. Let's use 5.25% for this example. Based on Adrian's information, it is established that he can pay as much as $2,761 per month on his home loan. However, with a fixed rate at 1.99%, he is only required to pay in $1,845.60 per month. Also, since his loan is a fixed-rate one, he can't make larger repayments. After four years, Adrian manages to pay off just over $50,000 and has an amount of $449,261 he owes the lender on his home loan.
Now let's look at Adrian's case had he opted for a variable rate home loan instead. Along with the flexibility to pay in more, variable rate loans usually come with redraw facilities that allow borrowers to access extra funds they pay in when they need it. In this case, Adrian goes with a variable rate loan at 2.39% and a $500,000 starting balance with payments of $2,761 per month. After four years of paying extra into his loan, Adrian can pay off almost $90,000 and owes $411,183 on his loan. What's more, Adrian has accumulated over $40,000 in available redraw account, for unforeseen emergencies, or perhaps as a deposit for an investment property. This is more than double the amount he's able to clear with a fixed-rate loan.
Comparison Rate & Hidden Fees
Many fixed-rate cashback-offers come as part of a package deal that have a high fee associated with them. These package deals may include several features like credit card and even income protection insurance that a borrower may never really use but will pay for. Several fixed-rate loans also have a yearly administrative fee. In addition to such expenses, borrowers should also consider the final comparison rate. A comparison rate also includes lender charges and other fees and is, therefore, the actual overall cost of a loan.
A revert rate is a rate your lender will charge you, once your fixed-rate period ends. Ensure that the revert-rate of your loan won't be significantly higher than the standard variable rate the market offers when the fixed-rate period ends. While revert-rates that are substantially higher than the market average are rare, but exceptions do exist. There are cases where the revert rate is used to recover borrower benefits during the fixed-rate period. Stay clear of such fixed-rate products. Also have a clear picture of possible break costs. Break costs are exit fees your lender will charge if you end your loan or refinance.
Essential Loan features
As clearly demonstrated in the first point, the ability to pay in more can play a crucial role in quicker homeownership and significant savings on overall interest paid. Additionally, benefits like redraw facility, the ability to make more frequent repayments, and the option to fix a portion of your loan can also help immensely. So, don't compromise on essential loan features while opting for a cashback offer with a very low fixed rate. Rely on a mortgage broker's professional guidance to understand essential loan features that could be necessary for your circumstances.
In a nutshell, the facilities and flexbility of a variable-rate home loan combined with a little self-discipline, can provide superior financial outcomes compared to the short-term benefits of a cashback offer.
The best approach to weighing the pros and cons of a cashback offer against the long-term benefits of a variable rate product is to engage the services of a seasoned mortgage broker. Not only will the broker scope the market on your behalf but also handle all your loan paperwork.
Reach us for the best way forward as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.