Home Loan, Interest Rate, Savings

Fixed Interest Rate for Certainty or Variable Interest Rate for more Savings?

Interest rate on home loan is currently at record low. Since August 2016, the Australian cash rate was on hold at 1.50% which recently been reduced to 0.25%. Many lenders have already adjusted their interest rate on home loan.

With this on-going period of steady and record lowest cash rate, some economists and commentators are wondering could it be time for a rate rise soon? Or the overall global conditions and international market will further push it down?

It’s tough to say when The Reserve Bank of Australia (RBA) will raise the cash rates again. Or how much of the rate cut will be passed onto the borrowers by the lenders in the future. However, this is the time to hedge your bets. Whether it’s a new home loan, mortgage, or refinance with a new lender. The choice is between stability and predictability, or the potential for savings. The choice is between fixed interest rate vs variable interest rate.

Australia’s Economic Outlook

Australian economy is slowly growing but at a steady rate over the last few months. At least compared to other foreign economies, Australian’s has managed much better. After GFC, the US kept their rates historic low, which lifted to 0.5% in 2016. While European Central Bank has rates hovering around zero.

Though some experts are still cautious, others have pointed out that Australia has managed much better than other countries in terms of economic recovery. The RBA expects that an extended period of low-interest rates will be required in Australia. However, history indicates that it won’t stay low in the longer term. However due to COVID-19 or Coronavirus the road to quick recovery is still uncertain and looks far as suggested by the leading economic and financial experts.

Statement by Philip Lowe, Governor: Monetary Policy Decision-

“Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low-income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario was for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020. After Coronavirus pandemic outbreak this looks quite uncertain the financial experts have adjusted their economic growth forecast to negative. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector.” See more

Australia’s Cash Rate in June 2020

The most recent Australian Government Bond Market moves and pricing are indicating we are likely heading to at least a zero cash rate by the end of 4th quarter of FY 2020 and will remain low till next year according to leading economic experts forecast. Currently, we are at a 0.25% cash rate.

So, like many others, confusion may arise which type of interest to select. Even with the 0.25% cash rate, major lenders are keeping their variable rate higher than the cash rate. In some cases, variable rates are higher than fixed rates.

More Security with Fixed Interest Rates

Fixed interest rate means the interest rate will be fixed for a specific period. Usually a minimum one year to maximum of five years.

One of the main benefits of choosing a fixed rate home loan is that you can predict home loan repayments during the fixed rate term. A fixed-rate might be a good choice if you’re on a tight budget. As fixed rate refinance home loan comes with certainty in terms of repayments that should be made.

The only downsides are it cannot bring the benefit if the interest rate moves downward. Depending on the product, you choose you may be unable to use extra features. Features like extra repayments, offset account, salary credit or redraw etc without attracting a penalty.

Surprisingly many lenders are keeping a fixed-term home loan mortgage rates lower than the standard variable rate at this moment. Talk to our expert Finmortg mortgage broker if you’re looking to score a low-interest rate.

Despite these hitches or risks, fixed rates home loans are still popular and provide certainty and hedge the interest rate risk in short-term. Especially amongst the conservative investors or first homeowners. According to the ABS’s housing finance stats, the percentage of dwellings financed by fixed-rate home loans have grown slowly over the last year. If you are more budget conscious and want control over repayments, the fixed rate may be the right option for you.

Opportunity for Savings with Variable Interest Rates

Variable interest rate typically fluctuates due to changes is cash rate. Every lender sets their own variable rates. This rate direction is determined by the official cash rate set by RBA based on certain economic indicators and the cost of funds.

The cost of funds means the interest rate paid to the depositors through savings accounts and term deposits. The more the difference between the cost of funds and borrower interest rate, the more profit the lender stands to make. This is why some lenders may not pass on the full rate cut as it may cut their spread.

For the borrowers, variable rates can help to save in a couple of ways. First, your lender’s variable interest rate may go down if the official cash rate goes down. Therefore, you will have the opportunity to save some money to pay less interest and lower repayments. Home loan products with standard variable rates also give access to extra features. If you have extra cash, you can make extra repayments to save on total interest. You can also utilise your available funds by keeping it in offset accounts. This will help to offset your loan amount and ultimately paying less interest on your home loan.

However, a sudden jump in variable-rate can upsurge the loan repayments significantly. Particularly if the remaining loan balance is high. A few basis points change in interest rate can increase your mortgage repayments by several hundred dollars.

It means the possibility to have an extra pressure on your budget. First homeowners or borrowers with limited income options are more likely to be vulnerable at the initial phase of their mortgage due to high outstanding loan balance.  Also new borrowers usually remain tight in fund situation as new home comes with additional costs. Costs like stamp duty, conveyancer or solicitor fees, any required renovations and not to forget the minimum 20% deposit requirements from the lender. Your home loan cannot fund these costs.

Choosing Your Options

Perhaps both variable and fixed interest rate have pros and cons. Choosing a suitable one will depend on your overall financial situation and objective. Your decision should reflect on a variety of factors, from your household budget to (if you’re investing) the other assets in your portfolio.

So, here are two simple ways –

  • Explore your options: Hundred of home loan products are available in the market to compare. And there is always something new adding up.
  • Take help from experts: Our expert Finmortg mortgage brokers can help to run a free quote comparison and analysis.

Our long credit experience and expertise are an edge to negotiate and craft a better home, car or business loan deal or service than you could by speaking to the bank directly.

We’re here to help you get it sorted. Talk to our expert to find the competitive interest rate with suitable mortgage or business loans product.

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