powering smart financial decisions

Aussies look abroad for new mortgage model

Aussies look abroad for new mortgage model

Millions of Australians with variable-rate home loans sweat on the decision made by Reserve Bank about interest rates. But in countries like the United States, it’s a very different story. There, homebuyers can lock in a 30 year fixed rate mortgage at an interest rate just under 4 percent.

Recent rollercoaster-like rate movements have led some Australians to wonder whether a similar product could work here, despite more than 80 percent of borrowers signing up to variable rate home loans in Australia.

Sam Wylie of the Melbourne Business School told ABC News that Australia’s appetite for variable rate loans is in stark contrast to other nations such as the Denmark, Germany, Japan and the US.

“About 75 percent of all loans in the US are 30-year, fixed-rate loans,” he said.

However, since the global financial crisis more Australians are turning to fixed rate mortgages, research suggests.

Damian Smith, chief executive at RateCity, said there are two main reasons borrowers are choosing to lock in home loan rates now.

“The [fixed] rates are really attractive; we’re at historical lows when you compare fixed rates to variable rates,” he said.

“The second reason is there’s uncertainty; banks are moving more or less independently of the Reserve Bank.”

The most popular fixed term in Australia is three years and the longest fixed loan available is 15 years, so would a 30 year fixed product work here?

“There would be quite a demand for it,” said Wylie. “Young households don’t want to bear that long term interest-rate risk. They’ve got enough risk associated with their employment and with paying their interest rates off without having to worry about interest rates going up.”

When is the right time to fix?

The fixed versus variable interest rate debate is tricky, admits Smith.

“In the last 20 years, if you’d fixed for three years, in any given month, you would have got it right about half the time,” he said.

Choosing which way to go with your loan is an entirely individual thing. Rate is not the only reason to fix; certainty of repayments is crucial for some people, he said. Yet, in spite of this around 2.5 million Australian households still prefer to take their chances with a variable rate.

“Refinancing does come at a cost, so do your sums and shop around to find the deal that bests suits you,” he said.

But there is, of course, one way to avoid the rate game and that’s by having an each-way bet – fix part of your loan and keep the rest variable.

Did you find this helpful? Why not share this news?



Related news

More news? Read more here