Fixed rates below 5%
Home loan fixed rates are set for further substantial falls in coming weeks with lenders expected to announce rates under 5 per cent as soon as this weekend – drops of 0.6 percentage points or more (see table below).
Already at near-record lows, the decline in global economic confidence amid fears of deflation in the US is seeing bond yields plummet to levels not seen in forty years. Lenders source their money for fixed home loans from the bond market and falling bond rates flow through fixed home loan rates within weeks.
With fixed rates over terms of up to five years already below many of the standard variable rates available, even lower fixed rates emerging are going to look very attractive to borrowers. New borrowers may well opt to fix at some very low one and two-year rates while existing borrowers may be tempted to refinance from their current variable rate.
By all means make the most of low interest rates while they last, but before locking in to any fixed rate Infochoice advises borrowers to bear a number of things in mind:
Variable rates also likely to drop
As the global outlook worsens, the more likely it is that the Reserve Bank will move to cut official interest rates which will flow through almost immediately to variable rates. RBA Governor Ian Mcfarlane said last week the RBA board stands ready to cut official rate cuts if needed. This could be as soon as early July but at this stage looks likely within the next few months at least. It may be that by the end of the year variable rates have dropped 0.5 per cent into the 5.5 to 6.05 per cent range.
Cost of switching
What looks attractive in fixed rates now may not look so good later this year, especially for existing borrowers who must also take into account the costs of loan refinancing – exiting one loan and establishing another.
Fixed-rate loans inflexible
Regardless of interest rate levels fixed-rate loans don't suit everybody. Most are inflexible with restrictions on extra repayments and early payout. Those who like to pay more than the set monthly repayment or who may sell and move house during the fixed term should think twice about locking in. Ultimately, the cheapest home loan is the one you can pay off quickest.
Choice is always a gamble
The choice between fixed and variable rates is always a gamble. It's almost impossible to predict where rates are going to be in a few months let alone a year or two. Fixed rates best suit those who want certainty of repayments into the future, not gamblers trying to pick the cheapest rate over time.
You can always split
Remember that splitting your loan between fixed and variable portions is also an option offered by many lenders.
The table below shows the lowest fixed rates currently in the market:
Source: Infochoice.com.au 13/6/03