More than 85% of Australia’s home owners now have a variable rate loan showing they aren’t too worried about future interest rate rises.
Who can blame them when the Reserve Bank has left rates on hold at just 1.50% since August 2016?
The thing is, history has a habit of repeating itself and, if rates start rising again, many home owners will be blaming themselves for complacency in years to come.
Beneath the rosy facade of low interest rates, Australians are more indebted than ever before and many homeowners could experience real financial difficulty if variable rates start rising.
Economic indicators all seem to be pointing in different directions and the future is very hard to predict.
With that in mind, it is a good idea to wipe the dust off the old fixed-rate mortgage contract and have a look at what’s inside.
First things first, let’s clarify what a fixed rate loan actually is. A fixed rate home loan is one where the interest rate is fixed for an agreed period of time - usually 1, 3 or 5 years. Throughout that period, you know exactly what your repayments will be each month, regardless of what the Reserve Bank does with its official rate or what happens on international financial markets.
In return for the fixed rate, your loan will be subject to a number of limitations that are not applied to a variable rate loan, such as no offset, and fees for breaking or varying the contract.
At the end of the fixed-rate term, the loan will usually revert to your lender’s variable rate.
Before we get out the crystal ball and try to forecast the future of interest rates, let’s consider something that should be more predictable and more important – your personal circumstances.
Ultimately, you need to decide if it’s wise for you to choose fixed or variable based on your own short-term and long-term plans.
In return for the security of fixed rate loan, you’ll lose some flexibility and will face exit fees if you make changes to your loan or extra repayments during the fixed rate period.
That means the key question to ask is how much flexibility you’ll need over the fixed-rate period you are considering.
It could be a bad idea to fix your loan if, during the fixed term:
Before you ask if now is a good time to fix, remember to ask: “is now a good time for me to fix.”
Now, let’s look in the cup and read those economic tea leaves.
Predicting home loan interest rates has always been complicated but in the last couple of years, it has become even more difficult.
This is because the link between the Reserve Bank of Australia’s official overnight cash rate and home loan interest rates has been broken.
You wouldn’t know if from the media coverage but the Reserve Bank no longer effectively “sets” home loan interest rates at its board meeting each month.
Instead, they are determined by a range of factors including the RBA’s cash rate, the rates available on international funding markets where lenders get much of their capital and domestic competitive pressures.
Right now, the median economist surveyed by The Australian Financial Review expects the Reserve Bank to keep its rates on hold until June 2020. But the futures market - where institutions lock in future interest rates – is predicting two rate cuts, implying the RBA will cut official rates by 0.5% to 1 per cent by August 2020.
Confused yet? Well, it just gets worse because this doesn’t even consider what will happen to funding costs for lenders on international markets, which changes week by week.
If professional economists and investors can’t agree on which way rates are going, what chance does anyone else have?
The good news is that right now, lenders are offering some excellent fixed interest rates.
At loans.com.au, we offer competitive fixed rates. View our rates here.
For a price lower than most other lenders’ variable rates, you get the confidence of knowing your repayments are locked in for the next three years!
If you can’t decide between a fixed or a variable rate, there is always a third option.
That option is a split loan, where part of the loan is fixed and the remainder is left on a variable rate. For example, you might fix 40 per cent of the loan, and leave 60 per cent variable.
That way if rates rise, your repayment will only increase on the variable part, but won’t change on the fixed part. Talk about hedging your bets!
At the end of the day, the decision on whether to fix your home loan or not comes down to your own circumstances and whether you can afford to take a risk. The good news is that if you feel like fixing is the right move, there are some great rates in the market to give you peace of mind at an amazingly low rate.