Interest Rate Limbo Land - What To Do?

Don't know what to do about your home loan? We ask the experts for advice.

With some lenders having moved in reaction to the November cash rate rise and others still holding back, many mortgage holders are feeling a great uncertainty as to what their next move should be.

Mortgage Choice senior corporate affairs manager, Kristy Sheppard said, "The interest rate waiting game is a difficult one, especially for those who aren't familiar with the home loan marketplace."

"Borrowers are hearing conflicting messages from everywhere, about what course interest rates are on, whether it's best to go with a fixed or variable rate, what's happening with exit fees and who is trustworthy.

"It must be so confusing and daunting for someone who took out a mortgage with little understanding of the market. Ignorance is not bliss in this case. As things change quickly, many Australians feel that they not only don't have a solid foundation of knowledge but they cannot keep up with market movements."

Here are some fast facts to help educate baffled home loan borrowers...

Interest rate moves

• Lenders can move rates any time, so today's landscape may be quite different from tomorrow's.
• Over one dozen lenders have increased their variable (and others, their fixed and variable) rates since the Reserve Bank raised the cash rate by 0.25 percentage points earlier this month.
• Some have not yet announced their move, but will most probably within the next couple of weeks.
• Most economists predict more cash rate moves in 2011. Prepare your budget for this now and perhaps try to make higher than necessary repayments to build a protective financial 'buffer'.

Fixed vs. variable rate choice

• At present, there are variable home loans with interest rates as low as the mid 6% range.
• Three-year fixed term home loans (the most popular) have rates as low as the low 7% range.
• You will most likely pay a premium to fix part/all of your loan and will most probably sacrifice some flexibility in doing so, ie. the loan probably won?t have as many features. Also consider break fees.
• You need to decide what dollar value you put on a guaranteed steady repayment level.

Exit fees

• These are calculated differently by each lender.
• ASIC is cracking down on unconscionable fees (those that make a profit rather than cover costs).
• Smaller lenders don?t enjoy the same economies of scale as bigger players. Exit fees help them to be more competitive by allowing them to turn what would be a large fee for establishing a home loan into a fee that is charged only if the customer exits that loan within up to five years.
• Australia needs a competitive market to encourage better loan pricing, innovation and service.

Choice of lender

• There is an extensive range of safe lenders in Australia, from the big banks through to smaller credit unions, building societies, non-bank lenders and others.
• When choosing a lender and loan product, be sure to weigh up pros, cons, needs and wants such as these: cost (upfront, ongoing, exit), features (interest rate and type, redraw, offset, portability, term), service (loan access, customer query channel, approval turnaround time) and reputation.

For more information, call Mortgage Choice on 13 MORTGAGE. Or, visit www.MortgageChoice.com.au.

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