Should I float on variable or fix my home loan interest rate?
Wednesday the 16th of September, 2009
Posted by Iden Money .
There is a common view from the financial gurus in Australia that variable interest rate rises are inevitable. From financial commentators to bank economists to the Prime Minister, the view is that during 2010 the Reserve Bank will move the cash rate up. How much? We don’t know, but the PM suggested about 1% by July. Also, banks have not discounted raising interest rates independently of RBA decisions.
What does this mean to home loan borrowers? Let’s take a look.
What You Pay Now
Our example is based on a $250,000 loan at the major banks’ average variable rate of 5.77%.
Principal and Interest repayments on this loan over a 30 year term are $1462. This means that if rates remain as they are you will pay $17,544 over 1 year, $35088 over 2 years and $52632 over 3 years.
What If The Rate Rises 1% Between January and July?
If the cash rate is increased by .50% in January and then a further .50% in April you would pay as follows:
1 Year - $18,762
2 Years - $38,262
3 Years - $57,762
Bank Fixed Rates
Let’s look and see what the difference would be if I locked into a bank fixed rate for 1, 2 and 3 years effective on the 30th September 09.
Bank 1 year rates currently average about 5.65%. Repayments for 1 year would be $14,125.
Bank 2 year rates currently average about 6.50%. Over 2 years repayments will be $37,920.
Bank 3 year rates current average 7.00%. Over 3 years repayments will be $59,868.
Summary of What You Could Pay
|
Yr 1 |
Yr2 |
Yr 3 |
|
| No Change @ 5.77% |
17544 |
35088 |
52632 |
| 1% Increase by July to 6.77% |
18762 |
38262 |
57762 |
| Fix for 1 Year @ 5.65% and then Variable at 6.77% |
14125 |
33625 |
53125 |
| Fix for 2 Years @ 6.50% and then Variable at 6.77% |
18960 |
37920 |
57420 |
| Fix for 3 Years @ 7.00% |
19956 |
39912 |
59868 |
NB – The above assumes that variable rates do not rise after July 2010.
CONCLUSION
These examples are simple scenarios based on average bank rates. If you have a higher or lower variable rate there could be major differences, especially for borrowers on Pro Packs where variable rates may be as low as 5.07%. These borrowers will notice a substantial advantage in remaining on the variable rate when comparing their costs to longer fixed rates. You can use the loan repayment calculator at www.idenmoney.com.au to do your own calculations.
The winner in the above scenarios is the borrower who fixes for 1 year now, however that would incur 2 years on variable in this example. Much depends on how high variable rates move up in the next year.
For those who think variable rates will rise by more than 1% in the next 2 years, locking in to a 3 year rate now may give comfort in the knowledge that repayments can continue to be made at that level for the duration of the fixed rate.
The additional factor here is that some economists are saying fixed rates may fall slightly.
There is a lot of crystal ball gazing here. The best thing that borrowers can do is to read up on interest rate articles written by banks and economists. Keep at it until you develop your own opinion as to what might happen.
Iden Money currently has funds available at the following rates as at 15/9/09:
Variable - between 4.78% and 5.25%
1 Year Fixed - 5.25%
2 Years Fixed - 6.09%
3 Years Fixed - 6.84%
You could save a lot of money by moving to an Iden Money rate. Click on Rates and Fees above for a full list of rates and Comparison Rates.
If you would like to discuss borrowing home loan money at these rates, give us a call on our New Business Hotline – 02 8844 8989.
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There is a common view from the financial gurus in Australia that variable interest rate rises are inevitable…..