When to fix a home loan

So­phie Elsworth looks at whether stay­ing on a vari­able rate is worth it

The Western Star - - Money Saver Hq -

TO FIX or not to fix? Home loan rates are con­tin­u­ing to tum­ble, putting bor­row­ers in the box seat to slash their debt at a quicker pace than ever be­fore.

It’s been a triple treat for mort­gage cus­tomers this year as they lapped up three cash rate cuts in June, Septem­ber and Oc­to­ber.

Ex­perts are pre­dict­ing there are pos­si­bly an­other one or two more cuts to come.

This means bor­row­ers need to care­fully weigh up if it’s time to bite the bul­let and lock in their home loan rate.

1 BEST IN­TER­EST RATES

There’s only a small gap be­tween the cheap­est vari­able and fixed rate loan deals. Many lenders are of­fer­ing rates un­der the 3 per cent mark on both loan op­tions.

Data from fi­nan­cial com­par­i­son web­site RateCity found, for owner-oc­cu­pier prin­ci­pal and in­ter­est loans, the cheap­est three-year fixed rate was of­fered by Re­duce Home Loans at just 2.69 per cent. Re­duce also had the low­est vari­able rate deal at just 2.74 per cent. RateCity spokes­woman Sally Tin­dall said, be­fore mak­ing any de­ci­sion, “find out what rates are avail­able for both” types of loans.

And with the RBA cash rate sit­ting at just 0.75 per cent, there re­mains only room for three more cash rate cuts be­fore hit­ting zero.

“The floor is in sight,” Ms Tin­dall. “Be­fore fix­ing, think about how much fur­ther fixed rates might fall to get to the bot­tom of the cy­cle.”

RateCity’s data found, when com­par­ing vari­able and fixed loans, on av­er­age fixed rates were just 0.19 per cent lower.

2 PASS­ING ON CUTS

Re­gard­less of whether or not there are more cash rate cuts to come, the question re­mains whether the banks would pass on more cuts to their bor­row­ers.

The big four banks have re­mained un­der in­tense scru­tiny for fail­ing to pass on the cuts in full. The Na­tional Aus­tralia Bank, West­pac, Com­mon­wealth Bank and ANZ only passed on be­tween 0.55 and 0.59 per­cent­age points of the 0.75 per cent of cuts this year, frus­trat­ing many bor­row­ers.

RateCity pre­dicts if there is an­other cut the banks will only pass on an es­ti­mated 0.14 per­cent­age point drop to loan deals and, if there are two rate cuts, they will only pass on a 0.28 per­cent­age point dis­count.

3 WHAT BOR­ROW­ERS ARE DO­ING

Lat­est data from the Aus­tralian Bureau of Statis­tics found of all new owne­roc­cu­pier mort­gages in Au­gust this year, only 11.9 per cent of bor­row­ers locked in their mort­gage rate.

Com­pare this with the Global Fi­nan­cial Cri­sis: in Au­gust 2008 a mas­sive 25.5 per cent of bor­row­ers locked in loan rates. On­line mort­gage bro­ker Uno Home

Loans’ chief ex­ec­u­tive of­fi­cer, Anthony Jus­tice, said its data showed in Septem­ber this year only 9 per cent of bor­row­ers opted for fixed-rate loans com­pared with 13 per cent in Septem­ber 2018.

“When you do get to the bot­tom, fixed is pretty good be­cause when rates start go­ing up you are al­ready locked in,” he said.

“We would al­ways say for peo­ple, if they want cer­tainty with what their re­pay­ments will be over the one, two, three, four or five-year pe­riod, then fixed is def­i­nitely worth con­sid­er­ing.”

RateCity found peo­ple who fixed three years ago would now be bet­ter off. If a bor­rower locked in a $300,000 30-year loan at the av­er­age rate of 4.02 per cent they would have paid about $35,240 in in­ter­est charges.

This com­pares to stay­ing on the av­er­age vari­able loan, where they would have paid $39,770 in in­ter­est charges.

They would have saved them­selves $4530 in in­ter­est charges.

4 SPLIT­TING A LOAN

For those want­ing to hedge their bets, hav­ing a por­tion fixed and a por­tion vari­able could be the best way to go.

HSBC head of dis­tri­bu­tion Alice Del Vec­chio said it had “a lot of cus­tomers who choose to do a bit of a com­bi­na­tion”.

“No­body is very good at deter­min­ing rate move­ments so it gives you the best of both worlds,” she said.

“You can fix a por­tion and have cer­tainty and se­cu­rity over ex­actly what the re­pay­ment is for a por­tion, but if you do think rates will move down­wards you’ve got a vari­able com­po­nent that al­lows you to put in a lot more money if you wanted and re­draw out as needed.” Cus­tomers could split any por­tion of their loan, for ex­am­ple, go­ing 50-50 or per­haps opt­ing for 70 per cent fixed and 30 per cent vari­able.

5 RE­STRIC­TIONS

Fixed rate loans give bor­row­ers plenty of cer­tainty but they do come with re­straints.

This in­cludes lim­it­ing how much ex­tra a cus­tomer can re­pay on their loan dur­ing the locked pe­riod.

Hefty break fees do ap­ply if the bor­rower de­cides to exit the loan be­fore the end date, so for those look­ing to sell their prop­erty or re­fi­nance their loan, ex­perts say it’s best to steer clear of fix­ing.

Ms Del Vec­chio said cus­tomers needed to find out ex­actly what re­stric­tions ap­plied to the loan they were look­ing to take out. “Dif­fer­ent lenders have dif­fer­ent fea­tures and dif­fer­ent prod­ucts – you have to be well aware of what’s in­volved,” Ms Del Vec­chio said. “Just be­cause it’s fixed it doesn’t mean it’s not flexible. “You’ve got to look in the de­tail and re­ally com­pare prod­ucts.” Fixed rate loans of­ten don’t come with mort­gage off­set ac­counts, which are prod­ucts that al­low cus­tomers to re­duce their over­all in­ter­est charges by keep­ing cash in their day-to­day ac­count linked to their mort­gage.

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