Making a choice about whether to fix your home loan interest rate or ride the variable rollercoaster could mean thousands of dollars to your bottom line. It can also mean hours of procrastination trying to decide the right financial step.
It’s a hard thing to predict the movement of rates and for most people the best strategy on average over a cycle of several years is to find the lowest variable rate possible and increase your repayments to as much as you can afford. But when fixed rates dip down to match, or even go below, variable rates, it’s worth thinking about fixing some portion of your loan. Here’re some tips to help you decided on a mortgage rate to suit your circumstances:
Compare fixed rates with variable rates
At the time of writing, three-year fixed rates were at their lowest level in three years. In fact, the major banks – ANZ, Commonwealth, nab and Westpac – offered packaged home loans with fixed rates at least 38 basis points below their standard variable rate. For a $300,000 home loan that’s a difference of at least $69 per month in the first three years. Rates change, however – so you must keep an eye on the market!
Consider smaller lenders
When RateCity crunched the numbers on some of the best deals being offered, fixed and variable, the smaller lenders certainly gave the big four banks a run for thier money. Smaller lenders can be much more competitive; you can save thousands of dollars per year by switching to a smaller lender.
Do your homework
Before applying for a home loan it’s important to consider more than simply the mortgage rate. Factor in fees, whether it offers an introductory rate and the total cost of the loan, and consider the features suitable to your circumstances. When it comes to fixed rates, understand that there can be pitfalls with fixing. For instance, you can lose redraw and offset facilities and revert rates can often be higher than average variable rates. Of course, if rates drop then fixed rate customers will miss out on potential savings too.
Finally, use a home loan repayment calculator to see the difference in monthly repayments for fixed versus variable, factoring in your own estimates on mortgage rate rises. But always leave yourself a buffer. Make sure you can comfortably cover a rate rise of at least 1 percent, and preferably up to 2 percent, before diving into what will likely be the biggest financial decision most of us ever make.