March 25, 2011
Despite no change to the cash rate in the past four months, Australian home owners are bracing for an interest rate rise and are rushing to lock in their mortgage interest rates at record levels since October 2010.
In February, the number of fixed rates peaked at 16 percent of all home loan applications made via RateCity, which is 5 percentage points more than the same period last year.
That figure soared in October 2010 to more than 30 percent of the mortgage market, when many predicted the Reserve Bank of Australia (RBA) would lift the cash rate. As expected, the RBA raised the cash rate by 25 basis points the following month.
Fixed versus variable rate mortgages
When the market fluctuates and interest rates are on the rise, many mortgage holders look to lock in the current rate for a fixed number of years. After that period, the loan will generally become a standard variable home loan that moves with the market.
Many lenders give you the option to tailor your mortgage with split options, so part of your home loan is locked in at a fixed rate, while the remainder is at a variable rate. In the case of an unexpected rate change occurring against your favour, your entire loan won’t suffer.
It’s important to make a calculated decision to fix all or part of your interest rate, because making the wrong decision could cost you thousands. For instance, in October 2010, RateCity recorded a difference of 35 basis points when the average standard variable rate was
7.05 percent and the average three-year fixed rate mortgage was 7.40 percent.
Can you really save with a fixed rate?
Fixing your interest rate to suit your situation can also save you money. For example, the current difference between the average three-year fixed rate, at 7.48 percent, and the average standard variable rate, at 7.33 percent, is 15 basis points. Variable rates only need to rise by 25 basis points in the next three months for you to benefit from an average three-year fixed rate.
In fact, using these averages for a $300,000 loan, you would save about $600 in just three years by choosing the fixed option.
How to know when to fix
It’s all about timing and borrowers should compare variable and fixed mortgage deals at comparison sites such as RateCity. When the difference between the two is close to 1 percent, and you are concerned that a rate rise is coming, consider fixing your rate.
Remember that fixing your mortgage is like paying for the security of knowing your rate won’t move for a period of time. Although by doing so, you also reduce your chance of saving money in the event that rates drop. So it’s important to do your homework before you lock yourself in.
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