Lock it in?

To lock it in or not lock it in -“ that is the question that faces home loan borrowers about interest rates when buying a property.

With fears over any shift in mortgage rates enough to send shockwaves through the local economy, coupled with the continued uncertainty of the real estate market place, many Australians have opted for fixed rate loans in recent years. In simplest terms, they offer a certainty of what is expected for the loan over an extended period of time.

But once that time is up, many mortgagees panic with the prospect of what to do next. The rates of the new fixed loans have usually changed since the time the original loan was locked in, while variable rate loans can be an unpredictable option.

Stephen Rossiter of Mortgage Choice Bondi Junction says this is the time that calls for action of behalf of the borrower.

You really need to be active and not sit back and just let the automatic process happen, he says. It is the time to review carefully what you have, either with your current lender or with a broker.

The lender of the existing loan will often present the best option they have, but they usually won’t present all the options they have the first time around. You need to ask questions and be direct about it.

Rossiter recommends the future of the loan needs to be explored at least two months before a fixed rate term is due to expire.

Many lenders simply roll a fixed rate loan over to a standard variable rate, while others will continue the loan for another fixed period of time, but at a new rate.

This is the time the borrower has to decide whether to stay with the current lender and what they are offering, or go shopping for a new deal.

Let’s say you have just come out of a three year fixed rate of 6.4 percent and the bank wants to roll you into their variable rate of 7.3 percent. But if you looked around, you might find a variable rate with another lender for only 6.2 percent. This is why it is so important to shop around in the market place.

The anticipated future of the property also needs to be considered, so that if a borrower intends selling in two years time, the loan should not be locked in for a three year rate.

Rossiter also warns to check on all the fees and charges of switching a loan, to ensure that changing to a lower rate won’t end up costing more once extra fees are added in.

I personally think you should review a home loan every few years, to see what is out there and improve your financial position, he says. If you are paying half a percent more than what you need to, it mounts up to big dollars over the years.

Sometimes it is a matter of staying with the same lender, but just changing the deal. That can mean such a difference in the dollars in the long run.