Do you fix it or keep it swing­ing?

The vexed ques­tion sur­round­ing home loan in­ter­est rates

Monthly Chronicle - - Business & Personal Finance - RAJ LADHER

With in­ter­est rates at a record low and tipped to start in­creas­ing over the next few months, is it time for you to start think­ing ahead?

The RBA has kept in­ter­est rates on hold for the last 17 months with a cash rate of 1.50% - pri­mar­ily to ease the Syd­ney and Mel­bourne over­heated prop­erty mar­ket, lower than tar­get in­fla­tion and the slow Aus­tralia job and wage growth.

Com­pared to some coun­tries such as United King­dom, USA and Ja­pan, there is still room for the RBA to fur­ther re­duce the cash rate. How­ever most chief econ­o­mists be­lieve the cash rate will start to in­crease to­wards mid-2018 due to fac­tors men­tioned above.

What­ever di­rec­tion rates move, it may be a good time to in­ves­ti­gate what a rate rise will look like in terms of your mort­gage repayments. Most banks of­fer the fol­low­ing rate types to suit your cir­cum­stances:

Fixed rates

As the name sug­gests, a fixed rate locks in an in­ter­est rate for a spe­cific pe­riod of time. In times where rates are un­cer­tain, fixed rates start to look ap­peal­ing.

Ad­van­tages – Fixed rates give the bor­rower cer­tainty of their repayments for a spe­cific pe­riod of time and al­lows you to be more ac­cu­rate with bud­get­ing. Most banks of­fer fixed rates from one to five years. In ad­di­tion to the cer­tainty, fix­ing in could mean that you are pay­ing lower than the in­creas­ing vari­able rate which saves you money over time. Disad­van­tages – Lock­ing in your in­ter­est rate means that you could miss out on po­ten­tial rate re­duc­tions. Fixed rates are also quite rigid as with most lenders you can­not make over­pay­ments or have ac­cess to an off­set or re­draw ac­counts. Also if you wanted to close down your loan, where, for ex­am­ple, you sell your home, you would be hit with a penalty which can be thou­sands of dol­lars.

Vari­able rates

A favourite for many bor­row­ers due to the amount of flex­i­bil­ity a vari­able rate of­fers. Vari­able rates sway up and down de­pend­ing on mar­ket forces like what the RBA cash rate is, and in­di­vid­ual banks’ com­pet­i­tive­ness/mar­gins.

Ad­van­tages – Vari­able rates al­low a great deal of flex­i­bil­ity for bor­row­ers as you can make ex­tra repayments with­out any penal­ties. Most banks will also of­fer a re­draw or off­set ac­count which al­low you to save money in a trans­ac­tional ac­count linked to the mort­gage, how­ever have full ac­cess to it. If your lender isn’t com­pet­i­tive in the mar­ket place, you can switch loans to another lender, penalty free. And of course, if in­ter­est rates re­duce, so do your mort­gage repayments.

Disad­van­tages – As the rate can in­crease and re­duce, it does not al­low bor­row­ers to bud­get ef­fec­tively. More im­por­tantly vari­able rates can put bor­row­ers at risk should rates start to in­crease.

Split rate

There is some mid­dle ground for bor­row­ers who like the sound of both as most lenders will al­low you to fix part of your loan whilst keep­ing the re­main­ing on vari­able. The ad­van­tages and disad­van­tages are as above, where it al­lows bor­rows to have some cer­tainty on part of the loan how­ever also have the flex­i­bil­ity of mak­ing over­pay­ments, ac­cess­ing the cash and ben­e­fit­ting from rate re­duc­tions.

On bal­ance

Fixed rates are es­pe­cially suit­able for bor­row­ers who can­not bud­get an in­crease in in­ter­est. How­ever, they are only suit­able for bor­row­ers who do not have any plans that may af­fect their home loan within the spec­i­fied pe­riod of the fixed rate due to the penalty.

Vari­able rates are suit­able for the less cau­tious bor­rower along with bor­row­ers who can make over­pay­ments in or­der to pay down sooner. This rate type can also save you on in­ter­est dur­ing times where rates are re­duc­ing, how­ever can catch out bor­row­ers with un­ex­pected rate in­creases.

De­cid­ing on which way to pro­ceed in terms of your loan struc­ture can prove to be a gam­ble. How­ever, for bor­row­ers who can­not bud­get a rate rise, fixed rates may prove worth­while, ir­re­spec­tive of in­ter­est rates re­duc­tions. Although you may have missed out on a sav­ing in in­ter­est, fixed rates are de­signed to give the bor­rower com­fort of known re­pay­ment amounts of the big­gest fi­nan­cial com­mit­ment most bor­row­ers have.

Speak­ing to a mort­gage pro­fes­sional may not only al­low you to save thou­sands in in­ter­est but also al­low you to struc­ture your loan to suit your cur­rent and fu­ture re­quire­ments.

Raj Ladher from To­mor­row Fi­nance is a mort­gage ex­pert with over 11 years' ex­pe­ri­ence both in the UK and Aus­tralian mort­gage mar­kets. Ac­cred­ited with the Mort­gage and Fi­nance As­so­ci­a­tion of Aus­tralia (MFAA) and ac­cess to nu­mer­ous lenders, Raj spe­cialises in all types of mort­gages, from first home­own­ers to in­vestors in­creas­ing their port­fo­lio. For more, email raj@to­mor­row­fi­nance.com. au

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.