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| Tips regarding buying property in Australia |
| 3. Fixed rates still a good option (January 2004) |
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After steadily rising over the last half of 2003, home loan fixed rates have edged down a somewhat in January giving borrowers some breathing space on any decision to lock in. Although the most attractive fixed rates have gone for this cycle, it is still possible to fix for three years at 7 per cent or below. The best four and five-year rates are currently 7 to 7.25 per cent while there a number of one and two-year rates to be found between 6.6 and 7 per cent. But with an economic outlook which remains strong, there's no guarantee there won't be further rises in fixed rates. Fixing at least part of your loan now at 7 per cent - around the current bank standard variable rate of 7.07 per cent - may well turn out to be a good option with variable rates fully expected to rise further this year. Over the next two years it is more likely that variable rates will be higher rather than lower. There is high competition in fixed rates these days which means there is significant variation in the market. It certainly pays to shop around with up to 0.75 percentage points difference at any one time between rates for a given fixed period. The banks are generally offering the best fixed rates but a couple of smaller lenders are also competitive. Most of the non-bank lenders, however, are concentrating on offering a competitive variable rate lower than the banks. But does fixing really suit? It’s important to consider that fixed rate loans won't suit many borrowers. The cheapest home loan is not necessarily the one with the lowest rate, it’s the one that allows you to pay it off soonest. The restrictions on extra repayments and early payout attached to fixed rate loans can make them very expensive in the long run. Every extra dollar paid off the loan early on saves $2 in interest by the end. Cost of switching There is also the cost of switching to consider - charges vary but they can outweigh any savings on the rate. Above all, remember fixed rates are always a gamble, especially over the longer terms of three to five years. You are committing to an interest rate for a period far beyond anyone's ability to predict rate movements. Trying to pick whether fixed or variable rate borrowers are going to come out ahead over this time period is always a matter of chance. A decision to fix should be considered as insurance against variable rises that might extend repayments beyond the limit of your finances. So for those who value the certainty of knowing just what their repayments are going to be over the next couple of years, it may well be better to lock in now. Property investors and owner-occupiers on a tight budget, for example. And for those borrowers not in a position to make extra repayments or not likely to pay out their loan during the fixed term, fixed rates can be attractive. A good alternative for many will be to fix part of your borrowings and keep the rest on a variable rate. But weigh up the costs of switching to this or any fixed arrangement with what you might save in interest. [source: news.com.au] |
