Borrowers taking the risk with variable loans

JUST one in six owneroccupiers are choosing to fix their home loans while the rest are taking a gamble on what interest rates may do in 2018.

Latest Australian Bureau of Statistics figures found in November 15.8 per cent of owner occupiers chose to lock in their interest rate – falling from 19 per cent in August.

The Reserve Bank of Australia board meets in 2018 for the first time tomorrow and it’s predicted they will keep the cash rate on hold at 1.5 per cent.

The cash rate has failed to move since August 2016 but there have been rumblings this could change later in the year.

Financial services firm Canstar’s group manager of research and ratings Mitchell Watson said borrowers should consider options as they could save by locking in their rate.

“With fixed rates as low as they are and speculation of a rate rise in the later part of 2018, it is understandable why people may be considering fixing their loan,’’ he said.

“Fixed interest rates when compared with variable interest rates are very attractive with one, two and threeyear fixed rates sitting lower than the average variable interest rates.” Canstar’s database shows on a $300,000 30-year home loan, the average standard variable rate is 4.42 per cent and monthly repayments are $1506. However three-year fixed rate deals have an average rate of 4.09 per cent and monthly repayments of $1448.

In recent years banks have adjusted their interest rates in both directions, regardless of cash rate moves – mainly due to tougher lending restrictions, particularly on investor and interest-only loans.

Lender ME has reported an increase in customers opting to fix in the past six months, climbing from 20 to 25 per cent.

The bank’s spokesman, Matthew Read, said concerns over a cash rate rise could be the catalyst for more people locking in, but there’s much to consider before entering a fixed-rate arrangement.

“The main benefit of fixing is repayment certainty and it provides peace of mind your repayments won’t change over the designated period,’’ he said.

There are penalties for breaking a fixed-rate deal earlier and some other charges apply. There are also limits on how much extra a customer can repay each year and often these deals do not come with offset accounts to help reduce the overall interest charges.