Fixed Rate vs Variable Rate Home Loans

by Sam White, Executive Director

There has been a marked rise in enquiries from home owners about fixing their mortgage rates since the Reserve Bank of Australia (RBA) began raising interest rates. The RBA's 0.25 per cent hike yesterday will likely mean further increases to variable and fixed rates with the major banks.

For home owners concerned about where the RBA plans to take official rates over the next 18 months, they should note that the cash rate is forecast to rise to about 5.0 per cent, and budget accordingly.

Home owners should be wary of locking into fixed rates, as many mortgage holders were caught out switching from variable rates prior to the economic downturn. While variable rates are influenced by the RBA, fixed rate pricing is driven by those who invest in the fixed rate wholesale markets.

Borrowers could end up paying thousands of dollars in extra repayments by moving from their variable rate loan. Our research has found that even if the cash rate went up substantially and the banks passed on all the rate rises, it may still not be worth fixing.

A snapshot of fixed rates as at November 2, 2009:

Lender/Product 2 years (p.a.) 3 years (p.a.) 5 years (p.a.)
CBA - MAV Package 7.19% 7.59% 7.89%
WBC - PAP Package 6.99% 7.39% 7.74%
ANZ 7.34% 7.69% 8.04%
NAB 7.29% 7.59% 7.89%
Average 7.20% 7.57% 7.89%


The lowervariable rates available in the market at the present time are around 5.35% p.a..

Doing some basic maths and assuming that the RBA increases rates by 3% over the next 3 years (a 0.25% increase every 3 months commencing November 2009), a borrower would be approximately $5,000 worse off if they fix now on a 3 year rate of 7.59% p.a..

For example:

A loan of$300,000:

  • Interest Only
  • 3 yr fixed 7.59% p.a.
  • RBA increases rates by 0.25% every 4 months commencing November 09
  • Banks pass on the full increase - no more.
  • Overall increase in variable rate over 3 years =3%

Month

3 Year Fixed Rate ( p.a.)

Interest

Variable Rate ( p.a.)

Interest

Nov-09 7.59% $ 1,897.50 5.60% $ 1,400.00
Dec-09 7.59% $ 1,897.50 5.60% $ 1,400.00
Jan-10 7.59% $ 1,897.50 5.60% $ 1,400.00
Feb-10 7.59% $ 1,897.50 5.85% $ 1,462.50
Mar-10 7.59% $ 1,897.50 5.85% $ 1,462.50
Apr-10 7.59% $ 1,897.50 5.85% $ 1,462.50
May-10 7.59% $ 1,897.50 6.10% $ 1,525.00
Jun-10 7.59% $ 1,897.50 6.10% $ 1,525.00
Jul-10 7.59% $ 1,897.50 6.10% $ 1,525.00
Aug-10 7.59% $ 1,897.50 6.35% $ 1,587.50
Sep-10 7.59% $ 1,897.50 6.35% $ 1,587.50
Oct-10 7.59% $ 1,897.50 6.35% $ 1,587.50
Nov-10 7.59% $ 1,897.50 6.60% $ 1,650.00
Dec-10 7.59% $ 1,897.50 6.60% $ 1,650.00
Jan-11 7.59% $ 1,897.50 6.60% $ 1,650.00
Feb-11 7.59% $ 1,897.50 6.85% $ 1,712.50
Mar-11 7.59% $ 1,897.50 6.85% $ 1,712.50
Apr-11 7.59% $ 1,897.50 6.85% $ 1,712.50
May-11 7.59% $ 1,897.50 7.10% $ 1,775.00
Jun-11 7.59% $ 1,897.50 7.10% $ 1,775.00
Jul-11 7.59% $ 1,897.50 7.10% $ 1,775.00
Aug-11 7.59% $ 1,897.50 7.35% $ 1,837.50
Sep-11 7.59% $ 1,897.50 7.35% $ 1,837.50
Oct-11 7.59% $ 1,897.50 7.35% $ 1,837.50
Nov-11 7.59% $ 1,897.50 7.60% $ 1,900.00
Dec-11 7.59% $ 1,897.50 7.60% $ 1,900.00
Jan-12 7.59% $ 1,897.50 7.60% $ 1,900.00
Feb-12 7.59% $ 1,897.50 7.85% $ 1,962.50
Mar-12 7.59% $ 1,897.50 7.85% $ 1,962.50
Apr-12 7.59% $ 1,897.50 7.85% $ 1,962.50
May-12 7.59% $ 1,897.50 8.10% $ 2,025.00
Jun-12 7.59% $ 1,897.50 8.10% $ 2,025.00
Jul-12 7.59% $ 1,897.50 8.10% $ 2,025.00
Aug-12 7.59% $ 1,897.50 8.35% $ 2,087.50
Sep-12 7.59% $ 1,897.50 8.35% $ 2,087.50
$66,412.50 $60,687.50

Anyone 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 in light of your family plans.

In other news, this edition of The Insider will be my last with you at Loan Market as I hand over to Loan Market Group co-founder and Executive Chairman, Sam White. It's been over five years since we started building what is now one of the largest independent mortgage brokerages in Australasia and I have thoroughly enjoyed the corresponding challenges and triumphs. Thank you for your support over the years, enjoy the fast approaching festive season and all the best of success in the future.