A mortgage that flicks between fixed and variable interest rates, depending on which is currently lower, sounds too good to be true… doesn’t it?
The loan product, Australian Mortgage Options’ Future Proof Loan, is aimed at investors and owner-occupiers alike, and it offers a deal that seems to offer the best of both worlds.
It works like this: borrowers obtain a loan at a variable rate. If the variable rate rises above the fixed rate, they can switch to fixed. Then if the variable rate drops again, they can switch back to the lower variable rate. The loan is also attached to a 100% offset account so account holders can make the most of their savings.
“It offers competitive rates and flexibility, but above all, security for borrowers in an otherwise unpredictable interest rate climate,” says Australian Mortgage Options managing director Robert Projeski.
“In an interest rate climate where the effects of the GFC are still being felt, many borrowers are feeling vulnerable and at the mercy of the major banks in terms of rate fluctuation, and could be susceptible to mortgage stress.”
Let’s say that you obtain a loan for $350,000, at AMO’s current variable interest rate of 6.68%. When taking out the loan, you locked in the fixed interest rate (assume 7%) that applies for the duration of your fixed term, which is up to five years.
For the next five years, you have the security of knowing your loan interest rate will never rise above 7%. If the variable rate lifts to 8%, you can switch the fixed rate of 7%. If the variable rate drops to 6%, you can move back to variable and take advantage.
While the product clearly provides some measure of interest rate stability when compared to traditional fixed rate products, it’s not necessarily the right fit for every borrower.
To begin with, this is not a “set and forget”, automatic arrangement. Traditionally, fixed rate mortgage holders opt for such a product as they no longer want to worry about interest rate movements. With this product, you will need to actively manage your loan and keep an eye on rate movements from month to month, as it’s up to you to request the switch between fixed and variable rates with the lender.
“Borrowers will be prompted by a letter in the mail advising them of movement in the variable rate. If the letter states that the variable rate has dropped and is lower than their fixed rate, then they will need to switch to variable to take advantage of the lower rate,” an AMO spokesperson advises.
For some borrowers, this may be a small price to pay for the benefit of a securing a cap on their maximum interest rate over a set timeframe, but you’ll need to decide whether a loan term of up to five years suits your circumstances before diving in.
Also, because you will be locked into a fixed term, those investors or homeowners who may look at selling in the next year or two may find that a flexible variable loan – or a split facility that is part variable/part fixed – is a smarter solution.