If you’re a homeowner, then the big ticket item on your budget will be your mortgage, and the choices you make about whether to fix your rate or ride the variable rollercoaster could mean thousands of dollars to your bottom line.
But how do you know when is the right time to fix?
Michelle Hutchison, spokeswoman for RateCity, said it’s a hard thing to predict the movements 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,” she said.
“At the moment, three-year fixed rates are at their lowest level in three years. And in recent days, two of the major lenders have slashed fixed rates by as much as 50 basis points.”
The number of borrowers applying for fixed rate home loans has soared recently; 18 percent of all home loan enquiries at RateCity were for fixed rates in August, compared to just 5 percent in July.
Peter Switzer, founder of Switzer Financial Planning said now may be the time to fix when the rates are low. But he warns borrowers to beware, because you can lose redraw and offset facilities.
“I think when they are low that’s the best time for people to think about fixing. They still could lose out, the world economy could be depressed for three years and interest rates stay low. But we do know that banks have been very reluctant to pass on interest rate cuts, so they’ll be happy to raise them,” he told Today Tonight.
The major banks – ANZ, Commonwealth, nab and Westpac – offer 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.
RateCity’s Hutchison crunched the numbers on the best deals being offered, fixed and variable, and none were from the big four.
“Smaller lenders are much more competitive; you can save thousands of dollars per year by switching to a smaller bank,” she said, adding that borrowers should do their homework.
“Use a mortgage calculator to see the difference in monthly repayments and factor in your own estimates on rates rises – but always be sure to 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.”