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Is now the right time to fix?

Is now the right time to fix?

Despite recent optimism for a New Year interest rate cut, latest inflation figures have damped enthusiasm.

The Consumer Price Index (CPI) rose 0.8 percent in the December quarter, following a rise of 1.2 percent in the September quarter 2013, the Australian Bureau of Statistics announced yesterday.

Alex Parsons, CEO of RateCity.com.au, said latest inflation figures have changed the outlook for interest rates in Australia.

“It came as a surprise because the market was expecting a slightly lower CPI increase. It’s a signal for rates this year and an indicator that perhaps borrowers should be more willing to consider fixing their home loan rate,” he said.

“The thing you’ve got to weigh up now is the value of your variable rate over, say three years, against locking in a fixed rate for that same period. The opportunities to lock in a fixed rate under 5 percent are there so it’s attractive for people to be looking into it.”

The RateCity database, of over 1000 home loans, shows that the average three year fixed rate is now 5.14 percent, and the lowest available three year fixed rate is 4.84 percent. By comparison, the average standard variable home loan rate is 5.42 and starting from 4.49 percent.

“Fixed interest rates can shift very fast – expect rates to move by a quarter, or even half, a percent quickly and unannounced. So far this year we’ve already seen 135 fixed rates adjusted up by as much as 0.20 percentage points and we expect this trend to continue,” Parsons said.

“We also would not be surprised to see out-of-cycle rate changes on variable home loans by lenders and for the cash rate to increase before the end of 2014.

“There are some lenders offering very attractive rates on fixed home loans now and it’s worth shopping around for these because the savings can be significant.”

Fixing is becoming more popular among borrowers, too, according to Parsons.

“In the last quarter of 2013 the Australian Bureau of Statistics reported month-on-month growth in the number of fixed home loans settled and it’s a trend we’ve noticed at RateCity too, with December being the highest proportion of fixed rate applications on record.”

Five tips to consider before fixing

  • Fixing can be an attractive option for borrowers because it offers repayment security, making it easier to budget.
  • But they aren’t as flexible, which can be a drawback for some, and some lenders make it harder to make extra repayments as a way of building a repayment buffer. And others charge big fees for exiting the loan before the end of the fixed term.
  • Another key area to watch out for is the interest rate to which fixed loans revert once the set period is over.
  • Most fixed rates revert to a variable rate option at the end of the fixed period, which depending on the rate cycle, could be more than 1 percentage point higher and can mean having to fork out thousands of dollars more per year to service the same loan.
  • Borrowers should prepare for the eventuality of higher interest rates in the future and make sure they could comfortably afford to service the loan if rates increased to the historical average of around 7 percent or even higher.

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