As a general rule, the best strategy for most borrowers is to get the lowest possible variable rate loan, with the highest possible monthly repayments.
But from time to time, there’s a brief window in the market where fixed rates might be more attractive for some borrowers, and it’s possible such a window is open right now.
By DAMIAN SMITH
Research conducted by RateCity shows that the average three-year fixed rate across more than 100 lenders has dropped by 14 basis points since June to a new low of 7.64 per cent. This compares to the average standard variable rate which increased in the same timeframe to 7.06 per cent. That’s only 60 basis points difference in favour of the variable rate.
Similarly, the average four-year fixed rate has dropped five basis points since June to 7.96 per cent, and a difference of only 90 basis points versus the variable rate.
A useful rule of thumb is that when the difference between variable and fixed rates is less than 100 basis points, there are merits in looking at a fixed loan. To illustrate, if you fixed for three years (using the average three-year fixed rate) and the average variable interest rate increased by one percentage point over two years, for a $300,000 mortgage you could potentially save more than $1200 in interest in three years. Obviously this doesn’t take into account any negative gearing benefits you may be getting, but on the raw numbers, there’s an argument to look at fixing.
What has prompted fixed rates to fall? Fixed rates tend to reflect the wholesale money market as much as they do the immediate Reserve Bank of Australia decisions, and over the past few months, the wholesale money markets are suggesting much slower increases in rates over the next several years compared to the breakneck pace over the past 12 months.
Fixing a home loan really does imply “timing the market”; there are generally only brief periods when fixed rates are close enough to variable rates for the extra cost on day one to be worth it. But particularly with the desire for predictable outgoings that many property investors have, now might be a good time to take a close look at fixed rates again.
Damian Smith is CEO at financial comparison website RateCity (www.ratecity.com.au). He’s one of Australia’s most experienced internet and technology executives, with leadership roles in Australia, the US, Japan and the UK for over 13 years. Damian holds a Masters Degree in Public Policy from Harvard University.
