As anyone with even a passing interest in finance will know, interest has been ultra low in recent years.
And while that’s been bad news for anyone trying to save for a house (0.5 per cent interest on your savings is getting you nowhere fast) it’s been good news for anyone paying off a house.
The Reserve Bank has kept the official cash rate on hold at the record low 0.1 per cent this month, but it’s predicted by many of those in the know that it will rise before the end of the year. In fact, Westpac recently announced it expects the cash rate to reach 1.75 per cent by 2024.
So, is now the right time to fix your home loan rate? The answer is a resounding probably.
If (slash when) rates rise, you’ll have locked in a lower rate, which is what you want when you’re paying off a home loan. This means you’ll be able to budget knowing how much interest you’ll be paying on your loan for as long as you locked your rate in, which could be the next one to ten years.
And since the bottom of the market has likely already passed, rates are extremely unlikely to get any lower from here on out. Rather, they’ve actually been slowly creeping up over the last year.
Twelve months ago, for example, Westpac was offering an owner-occupier two-year fixed rate of 1.99 per cent. Today, it’s looking more like 2.59 per cent. NAB and ANZ were both offering 2.09 per cent a year ago, but 2.69 per cent and 2.59 per cent today.
That’s an increase of 0.5 to 0.6 per cent – which is a lot when you’re paying off a mortgage. Three-year fixed rates have increased even further, closer to 1 per cent.
Variable rates (owner-occupier, P&I) in contrast, have gone down in the same period by an average of -0.33 per cent across the Big Four (from 2.57 to 2.24 per cent).
Higher fixed rates and lower variable rates are a fairly strong sign that banks are betting interest rates will rise, and that therefore variable loans will make them more money over the lifetime of a loan.
So, yes, now might be a good time to lock in a rate but it’s not a one-size-fits-all answer.
First, check whether you’ll be able to afford your repayments if your interest rate went up by 1 per cent (or more). This handy calculator will help you run the numbers. If that could be a financial struggle, it might be smart to fix your rate now so there are no nasty surprises.
But there’s more to consider. It’s also worth comparing the fees of switching (whether that’s within your current institution or to a new one), and whether you can retain the features of your current loan: offset accounts, redraw facility and any other bonuses you’re currently getting.
And, of course, by fixing your interest rate you’re gambling that interest rates won’t go lower (honestly, they probably won’t but there’s no guarantee).
The downside of fixed interest rates is that they’re much less flexible. You may not be able to make extra repayments, and remortgaging, paying off early and switching back to variable usually come with additional fees. Fixed home loans also often don’t offer offset accounts (which is a tax efficient way of making your savings work for you), and you may get rolled over onto a higher rate at the end of your locked period.
Recent Canstar analysis shows that if the cash rate rose to Westpac’s predicted 1.75 per cent, up from 1.0 per cent by 1.65 per cent, the average variable interest rate in Australia would increase from 3.04 per cent to 4.69 per cent.
If this happens, single buyers on the median Australian annual income of $77,900 could have their borrowing power reduced by $71,000 down to $388,000, while a couple earning the median combined income of $155,800 could see their borrowing power fall by $169,000 to $921,000. Bad news for those still struggling to get on the ladder.
For those already paying off home loans, that couple who borrowed $921,000 on the average variable interest rate of 3.04 per cent is currently paying $3,913 per month (inclusive of a $10 monthly fee). With a hike to 4.69 per cent, they’d be paying $4,781 per month. If they locked on to Westpac’s two-year fixed rate of 2.59 per cent before that happened, they’d be paying $3,692 per month, a saving of $1089 a month.
Of course, that’s not considering switching fees, loss of offset and redraw, and what the rollover rate is, and is based on projected not actual figures, but it’s still worth considering.
Paralysed by indecision? Hedge your bets by splitting your loan so it’s half fixed and half variable. Or, if you’re 70 per cent confident rates are going to go up, you can fix 70 per cent of your loan and leave the other 30 per cent variable.
As always, this is not personal financial advice and I can’t tell you what to do. Don’t @ me, speak to a financial professional (or ask your mum).
Until next time, stay savvy shoppers.