As Australian banks cut fixed term interest rates on home loans to record lows, financial counsellors at Consumer Action Law Centre have advised prospective borrowers to consider the longer term and what costs they would face should they need to opt out before the end of the fixed term.
‘The banks are clearly looking for business,’ said Penelope Hill, Manager of Consumer Action’s MoneyHelp service, ‘but mortgages are long-term financial products and unless you take a range of financial scenarios into account you may find yourself in trouble.’
A low fixed rate might look good now, but if the market changes over the next few years, borrowers might find at the end of the fixed period that rates are much higher, blowing their budget.
Redundancy, injury, illness, and a relationship breakdown can also impact someone’s ability to afford their mortgage. Factoring in higher interest rates, even when taking out a fixed rate loan, will help consumers deal with changed circumstances.
‘Some people like knowing what they’ll be paying a few years in advance – it provides certainty and helps them plan ahead. But as part of that planning they should look at how they would cope with a change in the market or with a drop in income, said Ms Hill.
Ms Hill also said that sometimes banks failed to explain to new borrowers on fixed-term deals that early repayment fees would be charged if they terminated their loan before the expiry of the fixed rate period.
‘Unexpected charges can have a significant impact. Consumers should look beyond the headline interest rate and consider the terms and conditions of contract. Do they suit your needs? Are they flexible enough? What would it cost to break the agreement?
‘Optimism is a great character trait, but when you’re shopping for a mortgage it pays to temper that optimism and think about a contingency plan,’ said Ms Hill.
Ms Hill said that all banks and lenders had an obligation to lend responsibly. ‘Even in a low interest rate environment, the lender must ensure the loan meets the borrower’s needs and does not cause undue hardship—this should include considering the prospect of interest rate changes’.
Australians struggling to meet mortgage repayments or pay their bills can speak to free and independent financial counsellor by calling 1800 007 007.
MoneyHelp is a service of the Consumer Action Law Centre and is supported by the Victorian and Australian Governments.