There has been much talk in media recently around the recent spate of lending institutions increasing the home loan lending interest rates out of cycle, the main reasons for this being the cost of funding.
There is a prediction that due to increases in interest rates around the world that Australia will likely see increases in our own RBA rates. What is unknown is the timing on this increase and how fast it will go up.
This uncertainly causes pause to consider your own home lending and review variable and fixed loan options.
Lending institutions get the majority of there funding from overseas sources and long term funding, this means that our interest rates are affected by how the world is performing and therefore your interest rate on your home loan can change even though the Reserve Bank of Australia (RBA) has not amended the cash rate from current base rate of 1.5%.
The RBA cash rate has an effect in our local economy and is directly related to Variable interest rates as it effects the short term cash market, where as Fixed interest rates are more related to overseas and long term funding costs. This is why when the RBA increase or decrease the cash rate, the Variable interest rates normally follow suit, however the Fixed interest rate changes independently to the Variable interest rate.
What are the current interest rates in the market?
|The Variable interest rates range from 3.58% - 4.35%|
|Fixed interest rates for 1 Year Term range from 3.54% - 4.39%|
|Fixed interest rates for 2 Year Term range from 3.65% - 4.39%|
|Fixed interest rates for 3 Year Term range from 3.79% - 4.49%|
|Fixed interest rates for 4 Year Term range from 3.92% - 4.74%|
|Fixed interest rates for 5 Year Term range from 3.98% - 4.84%|
As can be seen from the interest rates in the table above, the Variable interest rates are currently lower than the fixed interest rates, and the longer the Term you fix for, the higher the rate.
Factors to consider when taking out a Fixed interest mortgage are:
- Is your mortgage repayment a large proportion of your monthly budget and will fluctuations in an interest rate have an effect on your monthly budget
- Typically a young family will want the security of knowing what each months payments are and feel secure in the knowledge rate fluctuations will not impact them whilst the mortgage is fixed.
- How large is your mortgage? For example a rate rise of 1% on a mortgage for $200,000 will increase repayments by $115/pm where as with a mortgage of $500,000 the increase could be as much as $285/pm.
- Other factors to consider is the additional payments you are making, Variable interest rates can sometimes work out to be more beneficial.
This is why you will find most people will opt for a Split Home Loan where part is Fixed and part is Variable. This has the added benefit of providing you with a known repayment that will not change whilst giving you the flexibility to repay the variable loan portion faster, and as per example above it will have a smaller effect on your budget if interest rates rise.
Some institutions are now offering the best of both worlds. A Fixed rate home loan with a 100% offset account that allows you to payback your home loan faster whilst having the known interest rate that will not change within the term selected.
Not sure if Fixed interest rate home loan is right for you?
Getting a solution that works for your situation requires consideration of many factors, taking the time to talk with lending specialists at Azure Group Wealth, we can potentially help you save money and assist you with your decisions about whether a Fixed interest rate home loan is right for you.