Tim McIntyre: Whether To Fix Your Home Loans
The Reserve Bank, after a long time of sitting on the sidelines (get it? ‘Reserve’), finally moved to cut interest rates recently, continuing their odd trend of changing rates at their May meeting (nearly all of the last 10 rate movements have come in May).
Now, at the historic low point of 1.75%, interest really isn’t costing home borrowers all that much compared to years gone by.
It is still costing plenty when compared to everything else, mind you, but rate rises in the future are still believed to be inevitable. Even though it is starting to seem like we have always had super low interest rates, (just ask many young buyers who have only been aware of such ‘adult’ concerns for several years), history shows that the average rate on a home loan is around 7.5% between 1960 and now.
Compare that to between 4.5 and 5.5% on today’s variable loans.
There have been low periods and high periods in the past…I know my parents only paid about $120,000 for the house I grew up in, but at the time they were paying around 18% interest!
So when it comes to rates, it’s not just what goes up must come down, but what sinks, must also at some point shoot upwards gasping for air. Essentially, this is as low as it’s going to get…or very close to it. The room to increase is huge, while there is not much room for further cuts.
So, if someone offers you the chance to lock in a very low rate like this for the next 3 or 5 years of your home loan, why wouldn’t you do it? The demand for fixed rate home loans has dried up in recent times, with plenty of borrowers not wanting to fix in case the RBA slashes again and again and they are stuck paying more.
However, seeing as how the last 2 rate cuts have now come with more than a year of no action between each…you really wouldn’t expect to miss out on much by fixing. It’s rare to see fixed loan repayments around 4%, so if it suits your situation, now is a better time than ever.
Anyone who likes a weekly budget with no surprises will benefit from the routine certainty of a fixed rate mortgage. But on the other hand, fixed loans aren’t as flexible as variable rate mortgages and may not suit those who like to make extra repayments to reduce their balance.
You might be restricted from doing so or have to pay penalty fees if you attempt it. Be sure you won't need to sell or refinance during your planned fixed term, or the heavy break fees may outweigh the benefit.
Many of the major lenders offer competitive products these days and one option is to split your loan and fix one portion, while paying variable rates on the rest.
That means you have safety and the chance for a bit of flexibility.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and news.com.au
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au