It’s an exciting time when you find the property you want, and finally, have approval for the money required to buy it! Because that’s the reality now, most of us rely on loans to fund our property purchases.
There are significant differences between Variable and Fixed-rate mortgages. There are also some hidden traps to look out for when comparing those loan offers, especially within this low-interest rate environment when Fixed Rate offers are being heavily promoted by lenders.
Always ensure you read the Terms and Conditions before signing on the dotted line, so you know exactly what you are getting yourself into, especially if you are thinking of paying your mortgage off sooner than the contract states.
You might think you’re protected should you need or want to get out of the loan contract. But when the federal government stepped in and banned exit fees on all new variable rate mortgages in 2011, fixed-rate mortgages were not included in the ban.
So, if you are planning on paying your mortgage off sooner than expected, a variable rate mortgage may be a more appropriate loan structure for you, or even better you could split the loan so you have the portion you know you can’t pay back for a period in the fixed portion of your loan, and the amount you believe you can pay back faster in the variable portion.
Fees to watch out for with Fixed Rate Mortgages:
An establishment fee is a one-off payment when you start your loan. Usually ranging from $600 – $1,000.
An ongoing fee is charged every month or year for administering your loan – and this is usually around $10 a month.
Break cost fee
Break cost fees, also known as exit fees, early repayment adjustment fees or prepayment fees, are charged if you make extra repayments on your loan, pay your loan off in full or decide to switch to another loan type such as a variable rate loan.
Most lenders will allow you to pay a small amount off your loan each year without being charged, this can range from $10,000 to $30,000, however, if you pay more than this amount you may incur a hefty fee.
How are break cost fees calculated?
They are essentially based on three factors: the length that remains on your loan, what interest rate you are paying (compared to your current lender’s current fixed rate), and the amount you initially borrowed. Break costs can run into the tens of thousands of dollars depending on how much interest rates have changed.
A discharge fee, also known as a termination fee or settlement fee, will be charged when you pay your mortgage in full. This is normally $150 and covers the lender’s legal costs.
Purchasing property and using borrowed funds is a big financial commitment and therefore it is incredibly important that you seek independent legal and financial advice.
Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. If you would like more tailored advice, please contact us to speak with one of our mortgage brokers today.