February 15, 2011
After a year filled with consecutive rate hikes, many Australians are turning to the old staple of fixed home loans to bring them relief in 2011. With the floods staving off more aggressive rate rises in the near future, many are predicting more hikes later on. So is this the perfect time to lock yourself in?
Recent data from Mortgage Choice has already shown that demand for fixed home loans rocketed to a 31 month high in December 2010, and according to the Australian Bureau of Statistics, the percentage share of borrowers fixing their home loans has increased by 1.2 percentage points to 8.1 percent.
This is easily explained by the teetering relationship between variable and fixed home loans in 2010. For example, the average standard variable home loan rate out of more than 100 lenders across RateCity’s database rose 106 basis points from 6.28 percent in January 2010 to 7.34 percent in January 2011. This is while the average three-year fixed rate fell by 22 basis points from 7.65 percent to 7.43 percent during the same period.
The time to fix?
With experts leaning towards more rate rises in 2011, locking yourself into a three-year rate might seem like an easy decision, but you need to consider the long-term consequences.
Low unemployment and the threat of rising inflation may be enough to spur on rate rise predictions for now, but only time will tell how the outlook for 2012 and 2013 will affect future cash rate decisions by the RBA.
If we think back to 2008, the year began with concerns of aggressive rate hikes (which became true), but those who locked themselves into loans at the beginning of the year, when average fixed rates were around 8.45 percent, were in for a nasty shock come Christmas, when most home loans dropped below 7 percent (and continued to fall to record lows in 2009).
So how do I decide?
Compare how much you will save on variable loans compared to fixed loans, and get financial advice about variable rates in the future so that you know how much you could save.
And not everyone uses fixed loans for the savings. Thousands of Australians are happy to miss rate drops because fixed loans guarantee stability and allow them to manage their payments in the long term, without nasty shocks.
We all want to be the lucky one who locked in their loan at the lowest interest rate dip, but fixed and variable loans both have their risks. That’s why the savviest Australians compare home loans online, and make their own luck for 2011.