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The seesaw of fixed and variable home loans

November 24,2010

While rates for some variable home loans have increased and fixed mortgage rates dropped, will borrowers be better off fixing their home loans right now?

Out of more than 100 lenders monitored by RateCity, 66 have increased their variable home loan rates by as much as 45 basis points from November 1 to November 22. Meanwhile, despite some three-year fixed rates increasing, RateCity recorded 26 lenders to have dropped their three-year fixed rates by 22 basis points on average during the same period.

The right time to fix?
If variable rates keep increasing and fixed decreasing, and the gap between the variable and fixed rates will widen so you may be able to save more by fixing.

For instance RateCity discovered that since the start of the year borrowers with variable rate home loans have experienced their rates increase by an average of around 84 basis points. Compared to January, that's a difference of $158 per month.

They also found that the current average basic variable rate is 6.97 percent; however RateCity noticed some lenders offering three-year fixed rates not much higher from this. For example, ANZ's three-year fixed rate is currently 7.1 percent (as at November 22), only 13 basis points higher than the average basic variable rate. Five other lenders also have three-year fixed rates advertised at less than 7 percent.

If you were to lock in a three-year fixed rate for 7.1 percent, for instance, your repayments would be about $2140 per month for a $300,000 loan. In order to be better off, the basic variable rate only needs to increase by 25 basis points in six months - after three years you would be over $500 in front.

Make the choice
While there could be great savings if you opt to fix right now, make sure you do your research before jumping in to a mortgage. If you are unsure whether to fix or not, below are some tips that may assist you:

When fixed rates are lower than usual and you think rates will rise in the future, consider fixing.
Take the time to do research by comparing fixed and variable rates and then calculate the difference between the two. Comparison websites such as RateCity allow you to see what is on offer and compare home loans online.
Consider a fixed loan when the gap between the average fixed rates and variable rates is less than 1 percent.
It could be a good time fix when interest rates are on the upwards direction of the cycle. Determine the amount that variable rates must rise in order for you to save with a fixed rate.
Avoid fixed rates when interest rates are at their peak of the cycle as you may save more with a variable rate home loan.

Also, ensure you read any product disclosure statements (PDS) before signing contracts so you are familiar with all the terms and conditions of the loan.

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