Annoyed that you may have missed the opportunity to take out a fixed mortgage with rates set to move higher? Well, why not create your own?
It’s not such a crazy idea. You can simply turn your current variable home loan into a pseudo fixed loan by raising your repayments to match the current fixed term loan amount. And by doing so, you will not only be more likely to pay off your mortgage faster but at the same time you can enjoy all the flexibility a variable loan can offer.
So how do you go about it? In the first instance find out what the current repayments would be for a fixed loan. According to ratings house Canstar Cannex, the current average three year fixed rate of 6.94 per cent on a loan of $250,000 means a monthly payment of $1757.39. The average fixed rate for a five-year fixed loan is 7.65 per cent requiring a monthly repayment of $1871.94 on a $250,000 loan.
These repayments compare with $1552.80 a month on a current average variable rate of 5.62 per cent so by adopting this strategy you will either pay an extra $204.82 (with a three year fixed) or an extra $319.14 (with a five year fixed) a month.
If you choose to pay the equivalent of a three year fixed rate then assuming all things were to stay the same (which they are unlikely to do in reality) then you would save $52,398 in interest and pay off a 25 year loan five years and five months faster.
Clearly with the Reserve Bank governor Glenn Stevens current take on the outlook for rates, the variable is not going to stay the same, whereas for example the three year term of a fixed loan guarantees you that the rate will remain the same. Stevens recently hinted again that rates would probably start to rise again before Christmas.
But since the variable rate probably won’t jump 1.3 per cent in one hit (the difference between the standard variable and the three year fixed), there will still be some room to benefit for a few months yet. Indeed, the longer the average variable rate stays below the current fixed rate of 6.94 per cent, the better off you will be.
And the other good news is that you can maintain all the flexibility that traditionally comes with a standard variable loan – lump sum repayments, redraw facility and the ability to split your loan.
Peter Arnold of Canstar Cannex says: “You may well come out on top as long as the variable does not shoot up too quickly. While you may end up paying more after 18 months, by making the extra payments on your variable home loan that money is going towards paying off your principal. If you just had a fixed loan, this may not be the case.”
So having a do-it-yourself fixed interest loan through your variable is a bit like the old Claytons joke. It’s the fixed interest loan you have when you’re not having a fixed interest loan!
- Repayments on variable loans are currently lower
- Use the difference to pay off your principal
- Reduce your loan term by years by paying off your loan faster
- Retain the flexibility of a variable loan