Variable home loans still cheaper than fixed after rate rise

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Borrowers have been warned not to switch to fixed rate mortgages despite the prospect that interest rates will rise over the next two years.

Financial comparison company RateCity says it is cheaper for borrowers to remain with a variable home loan rate for the next five years rather than switching to a fixed rate as the latter generally has a higher interest rate.

The company says borrowers on a variable mortgage would still save thousands of dollars, even if the Reserve Bank of Australia (RBA) raised the cash rate by as much as two percentage points above its current three per cent.

“Even if variable rates may rise, fixed rates are also likely to rise, which means they’re still going to be up to two per cent higher on average (than) variable rates at the moment,” RateCity spokeswoman Michelle Hutchison said.

Over a five-year period, the current average fixed interest home loan rate has been 7.25 per cent, while the average standard variable rate is 5.25 per cent, Mrs Hutchison said.

“We’re expecting variable rates to rise this year by up to one per cent.

“If the average variable rate goes up half a per cent, it would still average 5.75 per cent.”

RateCity predicts the average standard variable interest rate will rise by two percentage points to 7.25 per cent over the next five years.

The total interest paid over five years on a variable home loan of $275,000 would be $85,185, Mrs Hutchison said.

Locking in a five-year fixed rate mortgage would mean borrowers would pay $95,753 interest on their loan.

But by staying with a variable rate mortgage, borrowers could save as much as $10,568 in interest and with about the same amount of debt paid off the loan, Mrs Hutchison said.

“Choosing whether your home loan should be fixed or variable is all about timing,” she said.

“If your variable rate is close to the current fixed rate, then it’s an easy decision to switch.

“However, if it is further than a one percent difference, the decision is much more difficult.”

On Friday, the RBA upgraded its forecast for the national economy and said official interest rates could move to a more normal, or higher setting, if recoveries in the global and domestic economies proved durable.

The RBA statement of monetary policy was the second time this week the central bank reduced hopes of another rate cut.

On Tuesday, the RBA left the cash rate at a 49-year low of three per cent, but indicated in its accompanying statement its easing bias had ended.

The futures market has priced in a two percentage point rise in the cash rate between now and December 2010.

The latest data from the RBA showed that in June the average interest rate on a three-year fixed mortgage was 6.5 per cent, while the standard variable home loan rate was 5.4 per cent.

AAP

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