Fixed home loans still worth considering

Fixed home loans still worth considering

June 2008

The likelihood of further interest rate rises this year has once again caused home loan borrowers to consider whether switching to a fixed rate loan is the way the go. With the consensus view tipping at least one more a 0.25 percentage point rise some time in the next six months, it makes sense to look at what deals are on offer.

While that short window of opportunity, where a number of fixed rates were much more attractive than variable rates has disappeared, there are still good deals to be found. And if certainty of payments is what is important to you, a fixed rate should be considered.

The March interest rate increase, along with increases by the banks outside of official movements in the cash rate by the Reserve Bank, has led to most rates on standard variable loans now being above 9 per cent, with most of the major banks around 9.47 per cent. While fixed loans don't suit everyone, there are plenty of fixed rates still on offer below 8.8 per cent for periods of one to five years. While switching costs and loan flexibility must be taken into account, fixing at least part, or even all, of the home loan should be considered by those feeling the mortgage pinch in the current climate.

Three-year rates range from 8.6 to 9.7 per cent with many being offered at around 8.8 per cent.

The best 1- and 2-year rates currently start at around 8.7 per cent. The best 4- and 5-year fixed rates start at 8.6 per cent with many being offered at 8.9 per cent.

Competition continues

While rates may increase shortly, there is still high competition in fixed rates these days and significant variation in the market. Check out both bank and non-bank loans. It certainly pays to shop around with up to 1 whole percentage point difference at any one time between rates for a given fixed period. That's $125 a month difference in repayments on a $200,000 loan.

For example St George Bank is currently offering some of the best fixed rates in the market with 8.65 per cent available for three years. While the lowest variable rate is 8.24 per cent from Crystal Clear Home Loans, a slightly higher percentage rate may be acceptable to those looking to lock in certainty. Crystal Clear's rate also compares very favourably with the highest 2-year fixed rate which is 9.64 per cent.

Compare fixed and variable rates in your state

Check loan flexibility

Fixed rate loans won't suit all borrowers. Restrictions on extra repayments and early payout attached to some fixed rate loans can prevent you paying off your loan as quick as you might like, but flexible fixed loans are around for those who look, and they are becoming more flexible everyday.

There is also the cost of switching to consider – charges vary but they can outweigh any savings on the rate.

Remember too that fixed rates usually mean committing to an interest rate for a period beyond anyone's ability to predict rate movements. Trying to pick whether fixed or variable rate borrowers are going to come out ahead over this time period is always a gamble. However, the chances of the gamble coming out in favour of fixed borrowers is currently better than it perhaps has been for more than a decade.

A decision to fix does at the very least offer insurance against variable rises that might extend repayments beyond the limit of your finances. For those who value the certainty of knowing just what their repayments are going to be over the next couple of years, it may well be better to lock in now. Property investors and owner-occupiers on a tight budget, for example. And for those borrowers not in a position to make extra repayments or not likely to pay out their loan during the fixed term, fixing is attractive.

Compare fixed and variable rates in your state.

Keep an eye on Ratewatch for InfoChoice's regular interest rates forecast.

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