Fixing not worth it says Loan Market Group
Australia’s largest independent mortgage broker has warned homeowners considering switching to a fixed interest rate that they are better off sticking to variable rates.
Loan Market Group Executive Director John Kolenda said the prospect of the Reserve Bank of Australia (RBA) increasing official rates had led to more inquiries about fixed rate home loan products.
But Mr Kolenda said the bottom of the fixed rate cycle passed at least six months ago and borrowers could end up paying thousands of dollars in extra repayments by moving from their variable rate loan.
“Most economists expect the current cash rate of 3.0 per cent could increase by at least 1.5 per cent over the next 18 months,” Mr Kolenda said.
“But even if the cash rate went up substantially and the banks passed on all the rate rises, it’s still not worth fixing.”
Mr Kolenda said mortgage holders could currently lock in a three year fixed rate on a $300,000 home loan at 6.89 per cent.
But he said over the same period of time if they stayed with an interest-only variable rate on a $300,000 loan their repayments would be significantly cheaper.
“They could save more than $8,500 over the three years sticking to the variable rate even if rates went up 1.5 per cent, or by a 0.25 per cent every three months,” Mr Kolenda said.
“Of course it depends on individual circumstances, but particularly for those who are paying interest-only, it is really not worth fixing now. Homeowners thinking about a fixed rate have probably missed the boat.”
Mr Kolenda said people were caught out switching to fixed rates last year before the economic downturn.
According to the Australian Bureau of Statistics, more than 125,000 people locked into fixed rates of more than 8 per cent in the 12 months to August, 2008.
“Those people then watched as the RBA reduced the cash rate by more than four per cent in response to the global financial crisis,” Mr Kolenda said.
He said while variable rate movements are influenced by the RBA, fixed rate pricing is driven by those who invest in the fixed rate wholesale markets.
“Anyone still weighing up their home loan options should talk to a mortgage broker and work through the costs of a variable home loan versus a fixed home loan over the next five years,” he said.
“Their mortgage broker could work out the savings over the three or five year term based on any rate rise the customer wanted to assume.
“This can help you see the real costs, and you can also look at what will happen if, for example, you choose a variable loan option assuming rate rises and then even making regular additional repayments.
“It’s never going to be exact as we can’t predict where variable interest rates will be, but our nation’s economists are giving us some signals on this for the next three years that we can use as a guideline.”
Mr Kolenda said people concerned about interest rates rising significantly may like to consider only fixing half or part of their loan, a popular alternative.
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Broker in the 'burbs September 18, 2009
“Most economists expect the current cash rate of 3.0 per cent could increase by at least 1.5 per cent over the next 18 months,” Mr Kolenda said.
No they don’t John….you’re making it up again.
Rory Robertson, interest rate strategist, Macquarie - “The market pricing of tightening for the next 12 months is far too aggressive, given growth is still projected to be sluggish for much of next year.”
Annette Beacher, senior strategist, TD Securities - “Let’s just say that the chance of a rate hike in October is much diminished today compared to yesterday. We have our timing of the first rate hike in June [2010]
Michael Blythe, chief economist, CBA: - “Markets were looking for some indication of that hardening to justify October rate rise calls, and we don’t appear to have got that.”
Riki Polygenis, economist, ANZ bank: - “You can interpret that as the RBA hedging its bets, clearly rates need to increase from here, but at this point in time the timing is still uncertain.”
Source: Sydney Morning Herald 1/9/2009
Yes John, rates are likely to increase and it will likely be over the next 18 months and our economy might justify these rate hikes…..but “at least 1.5% in 18 months”.
Who are the ‘majority’ of economists who suggest this outcome or are prepared to say publicly John.