With recent changes in variable rates, more home loan borrowers are contemplating some very attractive fixed rates.
Interest rates have remained at an all-time low in large part to the RBA not increasing the cash rate since November 2010. It may seem like it is the perfect time to lock in such a low interest rate, but statistics show this is not always the case and many borrowers often ‘panic fix’.
In March 2008, when the cash rate reached a high 7.25 per cent, more than 25 per cent of home loans were fixed. However, when rates fell to 3 per cent just a year later, only around 4 per cent of new loans were fixed.
So is now the right time to fix? According to Canstar, there is no definite right answer as there is a 50:50 chance borrowers will be better off. Canstar analysts compared the average month-by-month variable home loan rate with the average month-by-month three year fixed rate of the four big banks over the past 20 years. They found that since August 1992, there were 116 months where borrowers paid less by fixing their mortgage, compared to 127 months when borrowers chose a variable loan.
At the moment, the average rate for standard variable home loans is 4.83 per cent, compared to the average three year fixed rate at 4.53 per cent.
Justine Davies, spokeswoman for Canstar, believes that fixed rates are at the lowest they’ve seen in a while and it may be worth considering.
“Borrowers that are locking in at the average three-year fixed rate are locking in at 30 basis points lower than the average standard variable rate,’’ she says.
“For them not to be ahead after three years the average standard variable rate would need to drop by more than 30 basis points in the near future.”
For borrowers fixed rates are often chosen to either provide reassurance that repayments won’t change for a period of time or, to try to beat the market and enjoy a lower rate than the variable. Fixed rate home loans can be inflexible so fixing should be done with caution and by thinking carefully about your future plans.
Generally speaking, if variable interest rates continue to drop below your fixed rate, then getting out will prove expensive, especially if there is a lengthy duration remaining on the loan term. Get a job in another state and want to sell the property or want to switch because you find that the fixed rate is lots higher than what most people are paying for variable rates, could see you paying hefty fixed rate break costs.
There can be other limitations with fixed rate loans so understanding what you are getting is important. Here are some things to consider.
• If you fix your entire loan, you may be unable to pay extra at all or the amount extra you pay is very limited.
• Offset accounts are frequently not able to be linked to a fixed rate loan
• Consider having some fixed and some variable – split your loan into a variable and a fixed or multiple fixed portions if you wanted to hedge your bets even further.
• If you are changing lenders to chase a fixed rate, consider the exit and setup costs and factor this into your calculations to determine if it is worthwhile
• Get a good understanding of the variable rate that the loan will revert to at the end of the fixed term. Having to refinance again after the fixed term may end up being costly. Best case, sharp fixed reverting to a market leading variable rate
• Pay attention to the features. Some fixed rate home loans may have different features available compared to variable home loans. With the right combination of features you will pay a lot less interest over the life of the loan.
No matter which type of loan you prefer, there is potential for borrowers to save on a home loan by being proactive. At State Custodians, our Lending Specialists can give you the information you need to make a decision around whether to fix your loan or not. You can all them on 13 72 62 or leave your details here and they will contact you.