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Home owners: Beware the fixed rate rip-off

Big trap house! Security and alarm concept. Home protection
Don't fall into this trap, warns Nicole Pedersen-McKinnon. (Source: Getty)

Tempted to snare a bargain-basement fixed rate right now? There are a ton at an interest rate below ‘2’ – something that’s never happened before in our country.

That would be Covid-19 for you. But it would also be a TRAP.

Lenders en masse are luring customers with rock-bottom fixed rates but then slugging them on the variable rate to which the fixed rate ‘reverts’ and, of course, that rate for any variable portion of the loan.

Of which there should be half.

Yes, I believe you should only ever fix half a mortgage.

More from Nicole:

Why only fix half?

Usually, one of the reasons I believe in keeping half a home loan variable is in case official rates fall further and take a non-existent variable below what you are stuck paying on a fix. That hurts!

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Today, however, this is unlikely to happen thanks to the ‘trap’ lenders have set for borrowers who are suckered in. But I’ll get to that in a sec.

The big reason to keep half of your home loan on a variable rate is that you can’t usually make any extra repayments on a fixed-rate portion… meaning you cannot save extra interest and make your loan term deliciously shorter.

What’s more, decent offset accounts (those that slash an identical amount from your loan balance as what you hold in them) are usually only attached to the variable-rate portion of a loan.

And it is in fact into an offset account – for safety – that you should be making ALL extra repayments.

Remember all the kerfuffle at the beginning of Covid-19 about ME Bank raiding borrowers’ redraw money and sucking it up to reduce their loan balance (a move it later reversed)? It’s in loan T&Cs that most lenders could do it if they think you are in financial trouble or, indeed, if they’ve merely miscalculated your repayments.

And any precious savings you have parked in your mortgage could disappear.

Which brings me to the trap lenders have set.

Cheap (and nasty) to hook you in

Exclusive research given to Yahoo Finance by data comparison house mozo shows a huge blow out in variable revert rates, entirely designed to combat your fixed-rate interest savings.

Some are as much as 311 basis points – yes more than 3 percent! – above a lenders’ fixed-rate offer.

Mozo reveals just this month there have been 1152 cuts to fixed rates as lenders catch on to the fact these seemingly discount loans are getting customers through the door in droves.

Revert rates now span an unprecedented 2.17 percent to 5.10 percent on two-year fixed loans for owner occupiers paying principal & interest, with the average at 3.49 percent.

Meanwhile, lenders are throwing in cash-back offers on fixed loans of between $1000 and $3000 to further entice customers.

Mozo found nine fixed-loan cash-back offers with revert rates up to 4.55 percent, which is more than 200 basis points above the initial fixed-interest rate.

That’s no ‘cheap’ loan.

So what’s the solution? A loan with both a low fixed-interest rate and a low variable rate, so you can execute a smart, saving fixed/variable split.

These are the lowest but just be aware that only Well, Tic:Toc and Illawarra Credit Union offer real offset accounts, those that genuinely quarantine your savings from the loan, which is the only way to avoid a ME Bank-style redraw raid.

Lenders with the lowest total interest over 30 years. (Source: Mozo)
Lenders with the lowest total interest over 30 years. (Source: Mozo)

And what happens if you fix the lot? “[Unless you] switch your loan when the fixed period ends you’re on a collision course with the revert rate rip-off,” says Mozo director Kirsty Lamont.

“Failing to refinance your loan at the end of the fixed period could see your monthly repayments jump from $1568 to $2010, adding more than $88,997 over the life of the loan.”

And that’s a bonanza for the banks at borrowers’ expense.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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