June 30, 2011
If you’re nearing the end of your current mortgage deal or you’re looking to buy a new home then planning your finance strategy for the future is no walk in the park, particularly amid rate rise forecasts.
Many put their money on a June rate rise, persuading borrowers to lock in rates for a few years and avoid a financial storm. But June came and went and the cash rate did not budge from 4.75 percent, marking seven months without movement.
Fixed rates less popular
As a result, more borrowers are migrating away from fixed-rate home loans, according to the RateCity database. Currently 13 percent of borrowers are choosing to lock in rates, down from 16 percent in February and 31 percent in October last year.
Of those that are locking in rates, the majority are opting for shorter fixed terms now than in October too. For instance, three-year fixed terms accounted for almost one quarter of all home loans settled in October. Now they make up just 5 percent of home loans taken out, while one-year fixed terms are currently the most popular choice behind variable rate mortgages.
But with talk that a rate rise is imminent before the end of the year, which mortgage type makes the best financial sense – fixed or variable? The answer will depend on your circumstances. If money is tight and you haven’t made room for a rate rise in your budget, it’s always worth going for the security of a fixed rate.
That’s because a 25 basis point increase to the official cash rate would mean monthly repayments increasing by around $50 for a typical $300,000 home loan, based on the current benchmark basic variable rate (average of the big four) of 7.17 percent.
How they stack up
One of the top variable rate mortgages available through RateCity is the Loans.com.au Dream Loan Express at 6.58 percent. By comparison, one of the best one-year fixed-rate mortgage options is AMO Group at 6.78 percent. Fix for three years and one of the top mortgage options available is with HSBC at 7.04 percent.
For a $300,000 mortgage and using the above loan examples, you’ll pay $40 per month for the security of a one-year fixed-term mortgage and $145 to fix for three years, compared to the variable option. But with one 25 basis point rate rise, the variable rate loan at 6.83 percent would be $10 dearer each month than the one-year fixed rate.
So before you sign up for a home loan, compare mortgages online and factor in at least a 2 percent rate-rise buffer so you’ll know exactly what you can afford should the worst case scenario arise.
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