More NSW home owners opt for fixed over varied rate home loans

Choosing between a fixed and varied rate home loan may make you feel you are hedging your bets on the direction interest rates could take. As the period edges further away from the last Reserve Bank of Australia’s (RBA) rate cut, some 13 months ago, speculation has become heightened surrounding the next move.

Many homeowners are pondering whether now is the right time to lock in a fixed home loan, securing a low rate for a few additional years, and avoiding possible hikes. A considerable number of homeowners are already opting for a fixed rate loan, with the number on the rise across NSW.

June figures reveal 18 per cent of the total home loans approved across NSW were fixed, with the average mortgagee borrowing $463,200, according to the latest ABS housing finance data. This is the sixth highest proportion of fixed rate home loans recorded in the month of June. It also represents the greatest proportion of monthly fixed loans in almost four years.

The previous peak was experienced in April 2013 with 22.9 per cent of borrowers securing a fixed rate at an average loan size of $354,600. November 2007 had the highest portion of fixed rate home loans on record at a 25.4 per cent share of all home loans across NSW, with the average borrower obtaining a $280,400 mortgage.

A fixed rate offers the borrower certainty for the term of the loan, giving the reassurance that household budgets can be maintained. If the RBA decides to raise rates, fixed mortgage repayments remain the same. Borrowers on a variable rate are likely to incur higher repayments. If the RBA move the cash rate lower, it can leave higher repayments to mortgage holders on a fixed-term period rather than variable.

It is easy to become complacent after almost seven years of falling rates. Many homeowners continue to opt for a variable mortgage rate, often attracted by the flexibility this type of loan offers. If life presents a curve ball altering your financial situation, a variable mortgage allows lump sum payments and the ability to refinance without incurring fees.

The extended period of historically low rates is unprecedented. Realistically, it is highly unlikely this low rate will ever be experienced again in our lifetime. It is this mortgage environment that has made it tempting to financially over-extend, making even small incremental hikes significant for large mortgage holders.

We are all making an educated guess when, and if, interest rates will rise. Ultimately, only the RBA can make that decision. Banks have already started to creep home loan rates higher, creating a buffer to facilitate increased regulatory capital and levy requirements.

With an increasing number of NSW mortgages fixed it illustrates the sentiment of concern for future rate hikes. For those who remain undecided, consider splitting your home loan between a fixed and a variable rate - the best of both worlds.

SMH/ Sep 9, 2017