Opting to take out a fixed-rate home loan over a variable can save you money long-term. But, it’s a gamble that has less than a 50 percent success rate.
The fixed versus variable debate fires up again after the Reserve Bank of Australia (RBA) lowered the official cash rate to 2.25 percent during February. This has prompted financial experts to look more closely at which home loan type can provide borrowers with greater savings long-term.
According to recently published Canstar research, over the last 20-years borrowers who’ve rode the variable roller-coaster have come out better off than those who’ve fixed their rates. This is mainly attributed to major mortgage lenders making rate cuts, of some kind, when the Reserve Bank of Australia lowered the official cash rate.
In addition, popularity in variable rate home loans is said to be increasing due to ongoing discounts. These types of loans accounted for 44.4 percent of the home loan market, with standard and basic variable-rate home loans accounting for 16.9 percent and 13.8 percent respectively.
Economists are also predicting that another rate cut is highly likely before June of 2015. Therefore, it is expected that the popularity of variable rate home loans will continue to increase over the coming months.
Canstar compared a 3-year fixed-rate home loan over 20-years with variable rate home loans over the same period. Borrowers who fixed their home loan did better over 112 months, while those on a variable rate were ahead over 123 months. Therefore, the borrowers who took out a variable rate home loan were marginally better off over a longer term.
At present, fixed rate loan demand has hit its lowest in 2-years. In fact, according to the latest research, fixed rate home loans written in January 2015 were 22.3 percent less than those written in December of 2014. Whereas variable rate loans accounted for 79.5 percent of home loans written in January 2015 and a 2.2 percent rise on December 2014 figures.
The decrease in fixed rate loans being written is predicted to continue as the official cash rate is tipped to fall again in the coming months.
Of course, there is no right or wrong when it comes to selecting a home loan rate type. It is just a matter of what works the best for you and your personal and financial circumstances.
Mortgage experts suggest that if you’re seeking repayment certainty and are looking to stay in your home for more than 8-years, then a fixed rate home loan could be the way to go. However, if you’re not staying put long-term, or you are uncertain about your future then remain on a variable rate.
Another option borrowers are considering is a split rate home loan, where half the home loan is variable and the rest is fixed. This allows you to hedge your bets.
Do you want to save more on your mortgage? If so, then contact eChoice, and find the right home loan for YOU today.