Personal Solutions

Home  | Personal Solutions | Buying a Property  | Time to Fix?

Is It Time to Fix (Dec 2004)

When rates are expected to rise, how likely are borrowers to switch to a fixed mortgages? If history is anything to go by, most Aussies will stick with a variable rate with all its associated flexibility.

Late last year the number of home buyers with fixed loans of two years or more made up 14.4 percent of the total home loan market. This coincided with the increases in interest rates of 0.25 percent in November and again in December. But with no rises in sight beyond that, the proportion of fixed loans had dropped to 7.2 percent by June 2004.

Some of this downward trend can be attributable to the evaporation of the fear of interest rate hikes although for many market watchers it is more a case of Australians' general preference for variable home loans.

It is currently possible to fix your home loans for two or three years or more at interest rates below the standard variable rate, at a time when most economists are predicting more interest rate rises in the New Year. Currently, the best three-year rates range from 6.45% to 6.60%, with at least 65% of lenders offering 3 year fixed rates below the banks standard variable rate of 7.07%. This compares with an overall market-average standard variable rate of 6.80%.

There is fierce competition in fixed rates these days which means there is significant variation in the market. It certainly pays to shop around with up to 1.0% difference at any one time between rates for a given fixed period. Consider bank, non-bank and credit union loans.

Interest Rates	Home Loan Balance
	$250,000	$300,000	$350,000	$400,000
0.25%	$38.42	$46.10	$53.79	$61.47
0.50%	$77.26	$92.72	$108.17	$123.62
0.75%	$116.53	$139.83	$163.14	$186.44
1.00%	$156.19	$187.43	$218.67	$249.91
	Increased Monthly Repayments
The effect of an increase in interest rates on your 25 year home

SHOULD I FIX MY LOAN?

It’s important to consider that fixed rate loans won't suit everyone. When locking in your loan, you’re betting on the variable rate averaging more than your fixed rate over the fixed term. Therefore when fixed rates are below the variable rate it makes pretty good sense to fix.

With a fixed interest loan, there are usually restrictions on how quickly you can repay the mortgage. For instance, you may only be able to pay an extra $5,000 to $25,000 in repayments each year without penalty. And if you were to terminate your contract for whatever reason — even if you were just moving house — then you might find yourself faced with hefty break costs.

Fixed rates should be viewed as an insurance policy against the effect of rising interest rates stretching your repayments beyond your finances and not an opportunity to beat the bank when rates rise.

Fixed rates would suit those who benefit from the certainty of knowing just what their repayments are going to be over the next couple of years or first home buyers not in a position to make extra repayments during the fixed term and enable property investors to better budget rent against interest and property outgoings.

For many, hedging your bets may be the best option. Have some of your home loan at a variable rate and the balance at a fixed rate. That way, if rates rise, only half your borrowings will be hit.