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.
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.
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?
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 Aaron Sainsbury
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 .
Smartline Personal Mortgage Advisers
G5/1–15 Barr Street , Balmain NSW 2041
Authorised Representative No 298191
Smartline Operations Pty Ltd Corporate Authorised Representative No 376868
Aon Hewitt Financial Advice Ltd AFSL No 239183