If you’re thinking now’s the time to fix your home loan so you don’t get stung by higher interest rates, it’s probably too late. Most lenders have already started to increase fixed rates, making the variable rate look a much better bet. But that hasn’t stopped a surge in the number of borrowers seeking to switch to a fixed rate.
Since the governor of the Reserve Bank of Australia Glenn Stevens implied that rates could rise before the end of the calendar year, there has been a jump in the number of people looking to move from variable to fixed rate mortgages. Last Friday governor Stevens warned home buyers to factor in rises of up to 2 percent over the next 12 months – just confirming what we already know, rates are on the rise.
But unless you want the security of knowing what your repayments are by having all or part of your loan fixed, there is little other incentive to ditch your variable home loan.
Variable Wins Out
According to figures from rate watch group Canstar Cannex*, the average variable rate is 5.53 per cent. This compares with 5.51 per cent for a one-year fixed loan, 6.69 per cent for a three-year fixed loan and a whopping 7.37 per cent for a five-year loan. Translated into dollars that means on a $250,000 loan you are only paying $1539 a month if you are on the average variable rate compared with $1826 on a five-year fixed loan.
On those raw figures you could have paid $17,223 extra over the five years if you’d opted for the five-year fixed loan rather than sticking with the variable, assuming the variable rate remains the same. Of course, the variable is likely to rise but until it does, why would you choose to pay $287.05 more each month?
Trying to outsmart the professionals by fixing your mortgage rate is a tough call. Take all those people who thought rates were heading north in the first half of last year and locked in to a three-year fixed loan at the average rate of 9 per cent. Their payments of $2097 a month on a $250,000 loan are seriously higher than the $1539 they would be paying on an average variable loan. And they’re locked in for the fixed term with 18 months still to go. Ouch! At the time they took out the loan, they probably thought they were smarter than the average bear – sadly it was not the case.
So really the only reason why you should consider a fixed rate is if you want the security of knowing what you are going to have to pay each month on your mortgage. After all that’s what the fixed in fixed rate is all about – it is one rate for the specified period. But it’s fixed in other ways too. Often the amount you can repay is fixed. That means you can’t make extra lump sum payments, say when you get a bonus, without paying a penalty.
Split Your Loan
One way around this issue is to split your loan between a fixed and a variable rate. You might want to split it right down the middle or perhaps have 20 per cent fixed and 80 per cent variable – whatever, the choice is yours.
The general view is that, at most, interest rates will only rise a couple of percentage points at most over the next couple of years – and even then, not straightaway. So why lock yourself into a higher fixed rate now when the variable rate may not even reach that level for some time?
- A variable loan will generally prove better over the long term
- Some lenders have already factored in future rises into fixed rate
- Fixed rate does not offer flexibility
- Fix for security, not to outsmart the market
To get an idea of what variable and fixed rate loans you could get, try our One Minute Mortgage Explorer tool.