Fixed home loans lose favour as variable rates hit historic lows
Australian variable home loan interest rates are sitting at historical lows. The six cash rate cuts since 2012 have seen minimum mortgage repayments fall, additional repayments increase and even perhaps a few long-awaited house renovations completed.
During this time, fixed-interest rates have also come down, with borrowers able to secure lower rates than for variable options. At present one-, two- and three-year fixed interest rates are sitting on average at 4.85%, 4.96% and 5.17% respectively. These are all lower than the average basic and standard variable rates of 5.20% and 5.44% respectively.
These types of offers have seen an increase in the number of borrowers looking to lock in a rate. However, at its absolute peak in 2013 this was only 20% of borrowers!
So if borrowers are able to secure a rate for up to three years that is lower than current variable rates, why is it that at least 80% are still opting for a variable home loan?
There are a number of reasons - and they may vary among borrowers - but history shows that, when variable rates are going down, Australian borrowers tend to stay the variable course. In a nutshell, they see their interest rate reduce so there is no incentive for them to try to safeguard their money by locking in a rate, which there would be if interest rates were on the rise.
Along the same lines, should they lock in a rate now and interest rates continue to go down, they would miss out on those savings. Of course, conversely, should rates increase they could be saving money if they had fixed.
Fixed rates do also come with a few gremlins. If repaid early they can attract hefty break costs and generally they aren't as flexible as a variable option. Flexibility is changing but by no means for the majority of loans.
If fixing your home loan is on the horizon, it pays to understand what your future intentions are in order to make sure you pick the right term. If consideration is being placed on upgrading the family home in three years, perhaps a five-year fixed rate isn't the best option.
Also, if you would like to get ahead on your home loan repayments, look for a loan with flexible repayment options or access to an offset account. If in doubt on whether to fix or not, there is always the option to split your loan between fixed and variable.
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