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Home loan dilemma: Aussies caught between interest rate hikes

Home loan dilemma Aussies caught between interest rate hikes

Has the time come for Australians to fix their home loan? Jack Han investigates.

February 1, 2010

The time to purchase a home loanmay be nigh, as consumer confidence and economic indicators suggest more rate rises in the first half of 2010. Now the decision for home buyers is whether to rush into the market before the rate hikes, or wait until rates settle to compare home loans for the best offers.

The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 5.6 percent this month from 113.8 in December 2009. The Westpac report also observed the highest level of consumer confidence for mortgage owners since 1994 when data was first collected.

Westpac’s Chief Economist Bill Evans believes that the positive consumer outlook indicates that households appear to have comfortably adapted to the consecutive rate rises since October last year.

“Clearly a major source of relief for households was the absence of a further rate increase. With no meeting of the Board of the Reserve Bank in January the record run of three consecutive monthly increases in interest rates was interrupted.”

Another contributor was the surprising decrease of the unemployment rate from 5.6 percent to 5.5 percent in December 2009. With 35,000 new jobs created in the month, there is plenty of reason for optimism in the housing industry. However, this has fuelled speculation that the Reserve Bank cash rate will continue to rise this year.

On the average home loan of around $275,000, a rate rise of 0.75 percent to the average standard variable rate of 6.3 percent, will add around $130 a month to a 25-year loan.

To combat the looming interest hikes, thousands of Australians have arrived at the dilemma of either hurrying to find a low rate home loan to fix, or taking the time to compare and negotiate the most competitive offers.

Looking at the current disparity between fixed and variable loans, a home buyer taking up a one-year fixed home loan right now will be paying at least 0.5 percent more interest for the first half of the year (assuming that variable rates will rise by more than 0.5 percent in six months).

So if you fix, you will be assuming that interest rate hikes later on in the year will be high enough to offset the extra repayments at the beginning of the loan.

However, most home buyers are attempting to save by making sure that they find the lowest rate home loan with the most convenient features. For the majority of Australians, comparing mortgages online during rate hikes may cut up to 0.50 to 1 percent off of their interest rates, as more competitive financial institutions offer new packages to attract customers.

Don’t let the hype rule your decision – whether you will be squeezing yourself between the rate rises or not, find the best deals in the market online and show off your consumer confidence today.

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