Should you fix your home loan now?

Households could save up to $16,000 in mortgage repayments if they fixed their rates ahead of predicted rises, new data reveals.

While the Reserve Bank held its cash rate at a record low of 0.1 per cent after its latest board meeting, there is growing consensus that it is only a matter of when interest rates rise.

New Canstar analysis shows if a borrower with a $500,000 principal and interest loan locked in the average three-year fixed rate of 3.32 per cent now, they could save $221 on their monthly mortgage repayments, or $8468 in total interest, over three years – if CommBank’s latest forecast of the cash rate increasing to 1.25 per cent within the next year is realised.

That saving jumps to $431 a month, or $16,341 in total interest, over the three-year period for a borrower with a $1 million principal and interest home loan.

Canstar’s financial services group executive Steve Mickenbecker said while the average variable rate was lower than the average fixed rate, locking in repayments provided certainty for a generation of home owners who have never experienced a rate increase.

“[With a variable rate mortgage] you’ll be banking some of the savings up front, whereas with the equation of a fixed rate now you’re paying more right now than you would be on these low rates, so you’re front ending the interest rate increase,” Mr Mickenbecker said. “There’s a whole generation of borrowers who have never seen a rate increase, so it will come as a shock to them when they see it.”

Cash rate rise impact – $500,000 Loan

Potential impact of CBA predicted cash rate increases from 0.10% to 1.25% within the next year

Based on owner occupier loans on Canstar’s database, available for a loan amount of $500,000, 80% LVR and principal & interest repayments. Future cash rate based on CBA’s cash rate forecast (15 Feb 22) that predicts the following cash rate increases: June 2022 – 0.15%, Q3 2022 – 2x 0.25%, Q4 2022 – 0.25%, Q1 2023 – 0.25%. Calculations have placed these increases at the following time points: June, August, September, November 2022 and February 2023. Repayment scenarios compare a 3 year fixed rate loan compared to a variable loan that is taken out now, with a 30 year loan term. Source: canstar

More economists agree that inflation will rise this year – and interest rates along with it – which will see households paying more for the cost of living, including mortgage repayments.

“A borrower is going to be paying less interest on a fixed rate over a three-year period,” said Gareth Aird, CommBank’s head of Australian economics, adding that he believes Australia will see a significant increase in inflation.

“It’s not always about which way you’re better off, but it’s about peace of mind. There are other times when the fixed rate is quite a bit higher and households still choose to fix because they want to go to bed at night because they want to know what they can repay.”

With the last rate hike way back in November 2010 and a huge uptake in fixed rates in recent years, there will be a large cohort of homeowners facing higher repayments, according to Barrenjoey chief economist Jo Masters.

Cash rate rise impact – $1,000,000 Loan

Potential impact of CBA predicted cash rate increases from 0.10% to 1.25% within the next year

Based on owner occupier loans on Canstar’s database, available for a loan amount of $1,000,000, 80% LVR and principal & interest repayments. Future cash rate based on CBA’s cash rate forecast (15 Feb 22) that predicts the following cash rate increases: June 2022 – 0.15%, Q3 2022 – 2x 0.25%, Q4 2022 – 0.25%, Q1 2023 – 0.25%. Calculations have placed these increases at the following time points: June, August, September, November 2022 and February 2023. Repayment scenarios compare a 3 year fixed rate loan compared to a variable loan that is taken out now, with a 30 year loan term. Source: canstar

“Thirty five per cent of outstanding mortgages are fixed mortgages. Prior to the pandemic it was 20 per cent,” Ms Masters said, adding first-home buyers were most likely to fix rates as they are highly leveraged.

For James Algar, mortgage broker and principal at Mortgage Choice Dee Why, the majority of purchasers and refinancers coming across his desk were fixing rates.

“If you’re riding on a variable rate, your days of saving every day are numbered,” Mr Algar said.

“Rarely do you find in finance analysts all agree on the same thing, but every commentator is saying rates are going up – they just can’t agree on when it’s coming.”

Meanwhile, other home owners are hedging their bets on rates increasing either sooner or later by fixing part of their loan, according to Will Unkles, mortgage broker and director at Forty40.

“Some people play the long game and fix their loan with the hope of saving money in the long term or once rates rise,” Mr Unkles said.

“Then you’ve also got people who are hesitant to increase their monthly repayments now. A comfortable place is doing a 50-50 split.

“That way you have the exposure of a cheaper variable while ensuring the fixed component of your loan can protect you against future rate rises.”

With the average fixed rate moving above the average variable rate, many banks had already priced in expected rate rises, Mr Unkles said.

 

Article Source: www.brisbanetimes.com.au

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