Banks have slashed rates on fixed rate home loans to their lowest levels in 20 years, sparking an all out price war in which the winner is you.
The cuts are a clear sign that major lenders are anticipating further cuts by the Reserve Bank in 2013, but with fixed rates now as much as 180 basis points less than the highest variable rates on the market, now could be a great time to fix or split your home loan to save on your monthly repayments.
Even if the Reserve Bank does cut rates in a few months time, it doesn’t mean that your bank will follow suit. Last December, only 7 out of 92 lenders in Mozo’s database passed on the full rate cut.
So, what are your options? Switching to a fixed rate now or holding out and hoping for bigger savings down the track.
Let’s look at the following scenario. Jenny has a $500,000 home loan over 25 years at the current interest rate of 5.49%. What is the best option for her? Should she fix 100% of the loan for 1 year, split the loan 50% fixed 50% variable for 1 year or wait for a rate cut?
|Loan type||Interest rate||Monthly Repayment|
|100% fixed for 1 year||4.99%||$2,920 per month|
|50 / 50 split||4.99% (fixed) 5.49% (variable)||$2,994 per month|
|Variable||5.49%||$3,067 per month|
|.25% Rate cut||5.24%||$2,993 per month|
|.25% Rate cut 50/50 split||4.99% (fixed) 5.24% variable||$2,957 per month|
NB: Calculations do not include possible loan fees and ongoing charges.
In our scenario, Jenny will be $147.00 a month ($1764 a year) better off by fixing her loan for a 1 year period compared with her current variable rate home loan. Even if her bank passes on a full .25% rate cut, she will still be better off fixing or splitting her loan in the short-term. Our scenario doesn’t take into account any loan establishment or discharge fees so these should be taken into account if you are thinking of switching loans to work out actual savings.
No one can predict when interest rates will go up (or down) again but right now locking in low rates for the short-term can be a sensible option. Fixed rate products are priced at a level that variable rates may not reach for months with rate cuts.
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