This year, the Reserve Bank of Australia have cut the cash rate twice, taking the rate down to 1.5%. This is a record low for Australia.
The Big Four Banks (ANZ, CBA, NAB & Westpac) are offering variable mortgage rates of approximately 5%. Other lenders, including bank subsidiaries and mezzanine funders, are offering even lower rates below 4%!
As a borrower, your biggest concern is the potential change in your interest rates over the next few years. It’s obviously not ideal if the interest rate increases during the term of your loan because this means you are paying more interest than you would have if you opted for a fixed rate loan. A fixed rate loan means you know exactly what interest you will be paying for the term of the loan. The only catch is that you will pay a slightly higher rate for the benefit of a fixed interest rate. For example, a bank might be offering a variable loan rate of 4%, but to get a fixed mortgage rate you will be charged 4.5% interest. Despite this, some banks are offering great fixed interest rates – ING Bank have a 3 year fixed rate of 3.69%, Bankwest are also offering 3.69% and Westpac have a 5 year fixed rate of 3.85%!*
The next consideration is that many lenders don’t provide a fixed rate for more than 5 years. This is the banks’ way of hedging the risk that interest rates rise and they are losing income because you’re not paying the market rates for the term of your loan. There are only four lenders who offer fixed rates for 10+ years and they are Westpac, ANZ, Newcastle Permanent & Rams. Because the term is longer, you compensate them by paying a higher fixed rate than you would if the loan was 5 years as opposed to 10. For example, ANZ’s 10-year fixed interest rate is 7.24%, which is quite a bit higher than what you could get for a shorter term loan. Therefore, you would only take this loan if you think interest rates will rise significantly over a 10-year period.
So what should you do?
If you think interest rates will rise over the next few years, you can still take out a 3-5 year fixed loan at a competitive rate (around 4% at the moment). You could also opt for a combination loan, meaning your rate is fixed for a period but then becomes a variable rate after that period has lapsed. For example, for a 10-year loan, you might pay a fixed rate for 3 years and a variable rate for the remaining 7 years.
No one can be certain that interest rates will rise or fall; however, there are indicators that suggest interest rates have a reasonable chance of rising over the next few years.
Chat to a broker to discuss whether a fixed rate home loan might be suitable for you. Contact us on 1300 88 73 28 or email Shoheel at [email protected].
*Rates quoted in this article are subject to change without any further notification.