New research shows that the demand for fixed rate home loans has fallen to a two year low, with more borrowers opting for a variable rate.
According to the latest data from Mortgage Choice, fixed rate home loans equated to just 18 per cent of all loans settled during March. In the last 12 months, the fixed rate demand has gone from an all-time high of 33.06 per cent to a two year low, dropping in demand for the fourth consecutive month.
One of the main reasons for this can be attributed to the Reserve Bank of Australia (RBA) cutting the cash rate to a record low. Over the last 12 months, the RBA has steadily decreased the cash rate and it now sits at a very low 2.25 per cent. With some industry experts predicting that the RBA will cut the cash rate again in 2015, it is no surprise that more borrowers are choosing to apply for a variable rate home loan.
So what are the benefits of having a variable rate home loan?
More flexible: There are a number of ways a variable rate is more flexible. Variable rate home loans often have more features such as no limitations around additional repayments, ability to redraw and being able to have an offset account linked to your loan. All of these can save you interest and help you repay your home loan more quickly.
As you are not locked into a fixed rate home loan, you can be more flexible with refinancing or even selling the property. Having to move interstate can happen without much notice and if your rate is variable then selling your current home to buy another can be done without having to factor in fixed rate break costs if interest rates have risen. Some lenders have break costs for those who refinance during the fixed period and it can often be more expensive than staying put. However, with a variable rate, you are able to review your home loan and refinance with ease.
Rate cuts are passed on: If the interest rate varies, then so too does your rate. This will depend on what your lender passes on but generally in recent times we have seen most lenders passing these cuts on in full. When rates are falling this can be a welcome surprise.
As the interest rate falls you can reduce your repayments to give you more disposable cash. But getting ahead on your home loan could be as simple as keeping your repayments the same and allowing the extra repayments to build up.
Less Stress: If you can time the market right, then locking into a low fixed rate could save you significant money in interest if variable interest rates subsequently rise above the fixed rate. This is all about trying to pick the bottom of the fixed rate cycle and can create a dilemma and cause significant stress for people trying to lock in the lowest possible fixed rate.
Once the fixed rate period ends, the rate will revert to variable anyway so it only provides you benefit for a limited period of time. If you have fixed for some time and variable rates have risen, instead of your repayments increasing gradually, they could jump significantly when the loan reverts to the variable rate. People fixing always need to prepare for repayment adjustments after the fixed period ends.
Although a fixed rate home loan does also come with its advantages, at the end of the day if you are fixing to beat the market then it can be compared to gambling, trying to guess what will happen with interest rates in the future. One of the main advantages of having a fixed rate is knowing what your repayments will be for a fixed period of time. If you know your finances are tight and you need to stick to a rigid budget, you have the security of knowing how much your repayment will be every month. If you have gone back to a single income after having children, having repayment certainty until the second parent returns to work could make things a lot less stressful. In reality if you fix for this reason, then you won’t care if interest rates rise or fall, certainty for budgeting purposes is the main motivation.
If you are interested in exploring fixed and variable rate home loans get in contact with State Custodians. You can find out what is on offer from the range of home loans that State Custodians offers as well as 30+ lenders on their lending panel. Experienced Lending Specialists work hard to find the most competitive home loan options for you and can give you all the information you need to make an informed decision. Call on 13 72 62, or leave your details here and they will contact you.