Fixed, variable, standard, basic, offset, redraw, interest only, low-doc: there’s a veritable smorgasbord of mortgage options available to borrowers these days, but how do you decide which option is right for you?
More importantly, how do you determine whether a fixed rate loan is a better choice than a variable mortgage?
Borrowers seem to be betting on variable rates over fixed rate products at present, if the latest data from Mortgage Choice is anything to go by. It shows that just 10.7% of the home loans approved for its customers in February were attached to a fixed interest rate, down from 15.3% in January and 15.2% in December.
Mortgage Choice spokesperson Kristy Sheppard describes the appetite for fixed interest mortgages as being “at its lowest since October 2010, where it sat at 8% of our loan approvals, before rising as consumers reacted to November’s surprise rate increases”.
“It appears that new borrowers were lapping up the newly introduced deals on offer in February, taking advantage of lenders’ various incentives as they compete to outstrip each other of vital market share,” she says.
“A move away from fixed interest rates may also signal an uptick in positive consumer sentiment towards the economic outlook.”
However, it pays to keep in mind that the finance industry is expecting interest rates to increase in the next 12 months.
Both ANZ and CBA are forecasting that the Reserve Bank will increase the cash rate from its current level of 4.75% to 5.5% by Christmas 2011, while NAB is tipping it to rise to 5.25%, and Westpac is predicting a 5% cash rate by year’s end.
Overall, this equates to an expectation that mortgage interest rates will increase by 0.25%-0.75% within the next twelve months.
Currently, variable rate home loans are sitting at around 7.1%, while a 3-year fixed rate mortgage is around 7.4%.
Therefore, you’ll pay around quarter of a percent above the standard variable rate in order to lock in the stability of a fixed repayment for the next 36 months.
Sheppard explains that when you opt for a fixed rate, you’re essentially “paying a premium for the feeling of security and comfort that steady repayments offer.”
Whether it’s worth paying that premium is up to you, and ultimately depends on your personal situation, adds Anthony Ishac, general manager of Australian Property Monitors.
“There is always a risk in fixing a mortgage and picking the right time to do so,” he says. Just think of all of those borrowers who locked in their rates in early 2008 – mere months before mortgages plunged more than 3% in the wake of the GFC.
Having said that, “Now may be the right time to at least consider the option of fixing a portion of your mortgage,” Ishac says.
“With further rises on the cards, the opportunity exists to lock in a three-year rate now which may well be below the standard variable rate in a few months.”
