With RBA cutting down the cash rates to 2% in June, the home loan rates in Australia are at an all-time low. The question remains:
Will the good times last?
Most Australians believe that the rates might further go down, as there is 2% decline in the number of fixed loans since 2014.
However, with Westpac announcing an out of turn increase of 20 basis points on its variable interest rate, other banks may soon follow suit.
Confused whether to fix or not? We give you the highs and lows of both.
Practically speaking, with historically low interest rates on offer, the golden period for borrowers cannot stay the same. Peter White, chief executive of the Finance Brokers Association of Australia (FBAA) predicts the interest rates to go up to 7% p.a. in the next 5 years.
So if you are stretched for money or planning to have a family or travel or have sleepless nights thinking about your repayments, fixing is the way to go.
While a fixed rate home loan may save you sleepless nights, a variable loan offers you loads of flexibility to manage your loan. It is your financial condition and your future goals you need to take in account before making a decision.
Consequently, many people are choosing the middle path, by partly fixing their loan.
Lily and Sam decided to take a loan of $300,000 for 30 years. They want to travel and start a family and do not want to bet against the banks. However, considering they both receive good annual bonuses, they plan to pay off their loan early by making extra repayments as and when possible. Using our mortgage calculator, they calculate their repayment.
If they fix their loan for 3 years at 4.47% p.a., the monthly repayment would be $1533. However, if they choose a variable rate loan at 4.27% p.a., their monthly repayments would be $1480. Thus, choosing a variable rate loan would save them $53 per month at the outset. However, if the variable rate increases by 0.5% to 4.77% p.a, the monthly repayments would increase to $1569. A fixed rate loan guards them against the increase in rates but they lose out on flexibility.
Thus, Lily and Sam decided to fix two-thirds of their loan for 3 years, and take a variable rate loan for the remaining amount. A win-win situation, as they are guarded against interest rate hikes on most part of their loan and can still make extra repayments against the variable part of the loan.
HashChing advises you to not follow the crowd but take an informed decision based on your economic health and goals. Our mortgage brokers can help you take a decision by negotiating a better deal on your behalf at no cost or obligation to you.
And if you are a first home buyer then don’t forget to check first home buyer’s grant: eligibility & benefits