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Is now the time to lock in your mortgage rate?

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Official cash rates were left on hold last month. The Reserve Bank wasn't so clear this time about its openness to another rate cut but, at the time of going to the printers, some economists were predicting that the next move would be up rather than down - and that would be significant for the Aussie dollar's outlook.

If the next rate move is up, then maybe my timing was good when I locked in my investment loan in April. I for one had never locked in a mortgage before but at such low fixed rates, I couldn't resist.

At this stage I'm not paying a premium for the certainty and, while fixed rates have flattened, the sharp deals remain on the shorter fixed terms, RateCity reports.

lock in mortgage rate

You can get a one-year fixed rate 0.61% lower than a variable rate but, as RateCity analyst Peter Arnold says, one year is not a long time to recoup any switching costs, so weigh these up first.

So should you lock in?

It really is a guessing game.

The lowest two- and three-year fixed rates start at around the same level as the lowest variable rates. It is still possible to lock in for longer periods at competitive rates, with five-year fixed-rate deals from 4.42%. But Arnold says, "Longer terms are flattening out, after 12 months of steady decline".

If you expect two rate hikes of 0.25% each over the next four to five years, then locking in a long-term loan is a good idea.

Joe Sirianni, the executive director at Smartline Personal Mortgage Advisers, says we're probably close to the bottom in terms of how low rates will go, so there is certainly merit in considering fixing your rate, particularly if you're an investor.

"If you can be earning something like a 5% yield on your investment while paying something like 4.25% for the next three or five years, that's really ensuring you're maximising your investment returns."

I'm not losing too much sleep over my decision to lock in. After all, the reason I locked in the first place was to be sure of the amount of my repayments. This I now have for the next five years. I also have flexibility if I need it.

What some home owners may not realise is that when it comes to features, fixed-rate loans compare very well with their more flexible counterparts. Sirianni says the smaller lenders have strong fixed-loan niche products.

For example, lenders such as Adelaide Bank and Credit Union Australia offer a 100% offset facility against their fixed-rate home loans.

Heritage allows you to pay any extra amount into its fixed-rate home loan, as long as you don't pay it out in full: so you could pay $499,999 off a $500,000 fixed-rate mortgage without a break fee.

Of the 843 fixed-home loans on RateCity's database, 189 have an offset facility, 780 allow for lump-sum payments (this often occurs on fixed rate investment loans pre-tax time) and 764 allow for additional regular repayments.

On average, lenders allow up to $15,000 in additional repayments although some lenders such as Horizon Credit Union, ME Bank, Victoria Teacher's Mutual and Westpac's limits are $30,000 over the fixed rate term.

If you really want to maximise the amount of extra repayments you can make without being hit by a penalty, Sirianni suggests splitting your fixed loan into two or even three accounts.

"Many lenders allow you to pay up to $10,000 a year off your fixed home loan. If you knew you were able to pay an extra $30,000 annually off your mortgage, the strategy would be to split your loan into three and pay the maximum $10,000 off each."

Of course, the price you pay for certainty is that if you need to break your contract, you will pay.

The costs apply even if rates have gone up. As Sirianni says, they are there to compensate the lender for its economic loss of the interest that would have been paid until the loan term's end.

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.
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