Lock it in or keep it loose: Fixed rates vs variable rates

The RBA cash rate has not moved from 2.50% p.a. for 13 con­sec­ut­ive months and we are in for another 15 months of cash rate sta­bil­ity accord­ing to the ASX futures curve.

Depend­ing on your lender, vari­able home loan rates seem set to remain in the range of 4.65% p.a. to 5.10% p.a.

Most Aus­trali­ans are unne­ces­sar­ily pay­ing more than 5% p.a

Con­sider this: if you have a 5 on the front of your interest rate, then you could be throw­ing away huge sums of money every year.

A well known lender is now offer­ing 4.65% p.a. (with a 100% off­set account).

The con­sid­er­able sav­ings that can be made on a $300,000 home loan is out­lined in the table below.

Most Australians are unnecessarily paying more than 55 percent p.a

This chart below is show­ing a remark­able drop in the 5 year fixed rate. Aston­ish­ingly, three of the “Big 4″ lenders are now offer­ing 4.99% p.a. as a 5 year fixed rate. 5 year fixed rates at less than 6% p.a. are as rare as hen’s teeth. The fact that we are now under 5% p.a. is truly groundbreaking.

15 year history of a basic variable home loan with one of our major banks

If 3 year fixed rate terms seem more sens­ible to you, a reput­able “non major” lender is cur­rently offer­ing 4.69% p.a..

If you think your cir­cum­stances are not likely to change much over the next 3 to 5 years, fix­ing your rate is cer­tainly some­thing worth considering.

Many lenders are now offer­ing fixed rates for 5 years less than 5%pa and for 3 years for less than 4.70%pa. This rep­res­ents pretty good value in anybody’s view, surely. Vari­able rates are cur­rently slightly less than, or slightly more than 5%pa, depend­ing on your indi­vidual circumstances.

The long term aver­age vari­able rate is about 7%pa. Des­pite some recent spec­u­la­tion about unem­ploy­ment fig­ures lead­ing to another rate cut (it won’t, in my humble opin­ion), most com­ment­at­ors are of the view that the mid term trend for vari­able rates will be up from here. So it makes good sense to lock in a rate below 5%pa, right?

Fixed rates: Is it right for you?

Well, as with most of these types of things, it depends. Here are some things to con­sider before you lock in your home loan rate:

Do you want to make extra repayments?

Most fixed rate home loans will be very restrict­ive when it comes to mak­ing addi­tional repay­ments. Many will not per­mit extra repay­ments at all, while oth­ers will limit you to no more than $5,000 per year in addi­tional repay­ments. It var­ies from one lender to the next. Most will also not allow you to access those extra repay­ments via redraw as well, so be warned.

Do you want an interest off­set account?

Most lenders simply do not provide an interest off­set account with a fixed rate loan. If an interest off­set account is import­ant to you, as it should be to investors, then it pays to know which lenders offer this.

Do you plan to sell the prop­erty soon?counting money saved on home loan

Although legis­la­tion was enacted recently remov­ing the abil­ity for lenders to charge early loan exit fees, it is still quite legal for lenders to charge you a “break fee” if you pay out your fixed rate loan before the end of the fixed period. This fee can be tens of thou­sands of dol­lars. So you need to be as close to cer­tain as is pos­sible, before you fix the rate, that you are not going to need to “break” that fixed rate early.

This will apply regard­less of the reason — if you sell, refin­ance, switch back to vari­able or win the lot­tery — any time you break a fixed rate loan con­tract, you will be charged this fee.

So obvi­ously no mat­ter of how good a deal it seems to be, there is a lot to think about before you lock in a fixed rate.

If you have any other ques­tions about selling your prop­erty, be sure to give Eld­ers Real Estate a call on 02 9896 2333.

About 

With expert­ise span­ning mort­gage lend­ing, prop­erty law, prop­erty invest­ment and bor­row­ing to invest within Self Man­aged Super­an­nu­ation, Aaron Sains­bury offers more than 25 years pro­fes­sional advis­ory expertise.

He is an enthu­si­astic sup­porter of fin­an­cial lit­er­acy, work­ing closely with cli­ents to help them gain and main­tain con­trol of their fin­an­cial future.

Aaron is thor­oughly com­mit­ted to build­ing lifelong rela­tion­ships with cli­ents based on the highest qual­ity ser­vice, advice and trust.

Con­tact Aaron dir­ect on 02 9818 8643 .

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