Home buyers are passing-up on the opportunity to secure a fixed rate home loan and are taking their chances with variable rates. This trend, say financial experts, is attributed to the speculation about another rate drop.
According to national home loan approval reports, recently released, fixed rate home loans made up 17.41 percent of loans written in August 2015. This is a drop of 1.05 percent on July figures, with fixed rate home loan numbers now being at their lowest level since January 2013.
While national fixed rate demand is low, Victoria is the state with the lowest level of fixed rate loans. This state’s fixed rate home loans accounted for just 11.66 percent of all home loans written during August. Western Australia recorded 14.16 percent over the same period, and South Australia 14.59 percent.
Where is the Official Cash Rate Headed?
There is a great deal of conjecture over whether the Reserve Bank of Australia (RBA) will lower rates further. Australia’s official cash rate stands at 2 percent, but economists say that there is room for more downward movement.
At present, several economists are suggesting that another rate cut will occur before the end of the year, with November’s Melbourne Cup day being pinpointed as the time for change. A decrease in the official cash rate is inevitable say many economists, as the Australian economy is dormant and not growing at its expected rate. Unemployment remains relatively high, and wage growth is non-existent. Retail spending has marginally improved, but business growth has slowed considerably. Given this, it is expected that Australia’s official cash rate will remain low for at least another 12 months. This will then give the Australian economy time to recover.
How Do Fixed Rate Home Loans Compare to Variable Rate Loans?
Some financial experts say they are surprised by the drop in fixed rate home loan demand given how volatile the home loan market currently is. Lenders are moving rates on investment home loans up, and this is usually a time when borrowers crave greater security. But, this has not been the case. Australian lenders are increasing rates, and borrowers are opting to take out variable rate home loans.
In fact, recent reports have indicated that variable rate home loans have risen. For those looking to buy a home, financial experts are suggesting that home buyers do their research before signing a home loan contract, especially when there have been considerable changes made to lending policy and property prises continue to rise.
The new regulations issued by the Australian Prudential Regulation Authority (APRA) has seen the growth of investment-based home loans offered by the big four banks – NAB, ANZ, Westpac and the Commonwealth – restricted to 10 percent per annum. This has seen these banks change their lending policy and increase their rates on investment home loans.
Many financial experts suggest that if a borrower is seeking certainty in terms of their home loan repayments, then they should opt for a fixed rate home loan. If, however, a borrower is able to cover expenses should interest rates rise, and they believe that the current market rate is only going to get better, then they should opt for a variable rate, which will give them greater flexibility.
At present, according to sources, the lowest base variable investment home loan on the market is around 4 percent, whereas fixed rate home loans are at 4.30 percent for a 12 month to 3 year fixed term. If you’re looking to refinance, then always review home loan comparison rates as this rate includes the costs, such as fees and charges, of the home loan over its term.
Fixed Rate Popularity in the Past
Demand for fixed rate home loans surged in October of 2012, with it being estimated that 22 percent of all new home loans taken out by borrowers at this time, were fixed. This figure was just above the 12 month average of 21 percent. At the time, the official cash rate was at 3.25 percent and many home buyers thought, at the time, that rates just could possibly go lower. In fact, many thought a rate rise would be on the cards.
At this time, the Westpac bank was offering fixed rate home loans at 5.39 percent over 3 years. The Commonwealth Bank was offering fixed rate home loans for between 5.39 percent and 5.69 percent.
Since then, the official cash rate has continued to fall. So those who locked-in their home loans for a 3-year term will be waiting for October 2015 to roll around, so that they get a cheaper rate.
For instance, let’s say you took out a $300,000 home loan for 25 years and you decided to fix your loan for 3 years at 5.69 percent. Soon after the variable rate falls to 4 percent. Over the term of your loan, fixing at 5.69 percent for 3 years would have cost you approximately $17,000 more than leaving your rate variable.
Do you want to know more about fixed and variable rate home loans? If you said YES, then contact eChoice, we can help YOU find the right home loan.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!