Project Review by Property Mash: December 2, 2016

Think those low variable rates are set to remain low? The Organisation for Economic Cooperation and Development (OECD) believes otherwise, warning the Reserve Bank that low interest rates will stoke an already over-heated property market.

Over 80% of mortgagees opt for variable rates according to the 2013 Census. But with many economists now predicting an inevitable interest rate hike to cool the overheated property markets in Sydney and Melbourne, is now the time to switch to a fixed rate instead?

Interest rates payable on a variable rate loans, as the name suggests, varies as the lenders demands They will change the variable rate over time as the cash rate set by the Reserve Bank and their operating margin change. Whilst borrowers lose certainty with variable rate loans in that the rate can change with little notice, you do get flexibility, with the ability to repay loans and often to change lenders with relative ease and low cost.

Fixed rate loans on the other are difficult to move. In fact once you have a fix rate loan if you did decide to cancel the loan you will most often have to pay a range of penalties. On the other hand you have complete certainty as to your interest rate and repayments into the future.

The Australian Securities and Investment Commission (ASIC) have a nice little summary, which we copy here, advising of the plus and minus of each form of loan:


What you will gain by fixing your home loan

Fixed rate home loans are usually for a set period of time – often 1, 3 or 5 years.

Here are the advantages of fixing your loan:

  • Makes budgeting easier – You know exactly what you’re repaying. Whereas with a variable rate loan your repayments can ‘vary’ as rates change. See our  budgeting tips.
  • Rate rises don’t matter – If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate.

What you will lose by fixing your home loan

Here are the disadvantages of fixing your home loan:

  • Rate drops will annoy you – If rates go down below your fixed rate you will be repaying more than the variable rate and you won’t benefit from the rate drop.
  • Can you make extra repayments? – Extra loan repayments are often not allowed if you have a fixed rate, or may only be allowed with a fee. Variable rate loans usually allow you to make extra repayments at no cost.
  • Break fees – Fixed rate loans may also have a break fee if you change or pay off your loan within the set period e.g. if you sell your home

Here is a list we have created comparing the fixed and variable rates of the four major banks. These may differ depending on the specific features of your home loan, but provide a general idea of what rate the standard ‘no-frills’ home loan currently is. We have used the comparative rate and not the advertised rate.

fixed-rates-graphs

The 3 year fixed rate is currently the lowest across all lenders, which would indicate that the major 4 banks expect interest rates to fall, or at the very least to be stable into the immediate future.

If the OECD is correct, and the Sydney and Melbourne property markets remain strong, then the Reserve Bank does have to raise rates, then we will see rising interest rates across the board. Is this is the case, then perhaps there is a window now to take advantage of these lower fixed interest rates and lock in a fixed rate.

Sources:

The Real Estate Conversation – OECD says Australia must lift interest rates to cool housing market

5609, 9a. Housing Finance Commitments by Type of Buyer and Loan

NAB – Interest Rates for Home Lending 

Westpac – Variable Interest Rates

Westpac – Fixed Interest Rates 

Commbank – Fixed Rates 

Commbank – Standard Variable Rate 

ANZ – Standard Variable Rate (and Rate Calculator) 

Investopedia – Which is better, a fixed or variable rate loan?

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