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Fixed last year? Switch now and pocket $720 a month

Fixed last year? Switch now and pocket $720 a month

Jackie Nevill reports on how many Australians can save $720 a month by switching from last year’s high fixed rates to a variable home loan.

October 16, 2009

Some Australian mortgagees may be panicking in light of the interest rate rise announced on October 6 – somewhat earlier than originally predicted. However, research from RateCity has shown that borrowers, who locked in to a high fixed rate last year, may now have a window of opportunity to save money on their home loans, if they switch to a variable rate now.

As rates crept upwards early last year, many astute home owners locked in a fixed rate – commonly around 9 percent for three years. On a typical $300,000 loan, this equates to repayments of $2,518 per month.

But as rates plummeted in the months that followed, with the official cash rate reaching a low of 3 percent in April this year, many of those borrowers will be kicking themselves. Break costs, on the surface, can appear too high to jump over.

But it pays to do the sums. Damian Smith, RateCity’s CEO, says even considering break costs, Australians stand to make significant savings by switching their loans.

“Fixed interest rates have been rising since April and variable rates have stayed low, so break fees to cancel fixed home loans are the lowest they have been about a year,” he says.

“As a result, people who locked in at close to the highest fixed rate last year could find themselves much better off if they compared current rates on the market.”

How much better off?

Let’s take the same $300,000 loan, but with a 5.25 percent p.a. variable rate. Monthly repayments drop to $1,798. Compared to our 9 percent fixed rate, this is a saving of $720 per month or $17,280 over a two-year period.

By comparison, the break cost after one year, which can be calculated by the difference between the lender’s current two-year fixed rate and your rate, would be around $12,900. That’s $4,380 back in your pocket if you choose to switch.

Of course, the catch is rising interest rates. “The risk with a variable rate is that it can rise so it is all about timing when choosing to go variable or fixed,” says Smith.

Even if rates increase another 0.5 percent, monthly repayments on a three-year fixed rate are $1,887, a saving of $631 per month or $15,144 over two years – still $2,244 more than your break fee.

As rates have already started to climb, the time to act is now. Smith advises that borrowers considering switching should try to keep repaying their loan at the higher rate instead of the minimum amount.

“This will save you thousands and substantially reduce the period of the loan,” he says.

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