It’s a question that’s on the lips of many Aussie property investors – is it time to fix rates?
Opinion: David Lammey, Firstmac’s General Manager of Digital Brands
Home loan interest rates are always a hot topic in Australia because they have such a big impact on our great love of residential property.
Yet in the past couple of weeks, there seems to have been an even higher level of chatter on rates, coming from a couple of different curiosities.
The first has been the attention on the large numbers of interest-only home loans that are due to expire and transition into requiring principal and interest repayments (which by default can drive monthly repayments up by more than 30%). Some commentators have said this could trigger a substantial amount of ‘mortgage stress’ amongst homeowners, which could lead to a broader erosion of property values across the market.
Low rate investment home loans
|Low Rate Inv Loan w/Offset||3.15%||3.16%||$1,718||More details|
|Inv Discount Variable P&I 80%||3.37%||3.39%||$1,767||More details|
|Inv Base Variable Special Offer P&I||3.50%||3.54%||$1,796||More details|
|Low Rate Inv Loan w/Offset|
|Inv Discount Variable P&I 80%|
|Inv Base Variable Special Offer P&I|
Base criteria of: a $400,000 loan amount, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 1 November 2019. View disclaimer.
Secondly, there has been increasing commentary around the prospect of rate rises, not driven centrally from the RBA increasing its cash rate, but rather from those many individual lenders in the market who have had their cost of funding increase markedly in the past month or so.
It’s been a long time…..
After what has seemed like an eternity since the RBA last changed the official cash rate (down by 25 basis points to 1.50% back in August 2016), it probably shouldn’t come as a surprise that some people are making a big deal out of the current chatter.
But is it enough to move the needle on shifting mortgage holders from their variable rates across to fixed rate home loans?
Anecdotal evidence coming out of Savings.com.au’s sister brand loans.com.au (both of which are part of Firstmac – Australia’s largest non-bank lender) is that people are starting to bring up the topic of fixing their home loan rates more frequently in conversations.
Talking to thousands of people every month shopping for new home loans (both purchases and refinancing) as well as taking calls from their tens of thousands of existing customers, the Lending Specialist and Customer Care teams at loans.com.au have a front row seat to where the trend changes in the mortgage market often begin to appear.
And the message from them is that a lot more people are starting to consider fixing the rate on their new or existing home loan.
Will this lead to a material shift? Only time will tell, but several of the more experienced team members at loans.com.au in those customer and prospect facing teams say that these shifts in the market can happen quite quickly.
But back to interest rates and prosecuting the case for fixing a home loan now.
Where are we really at in the current cycle? What sorts of investor rates are currently available in the market and how do they compare to the good variable rates on offer?
Interest-only (IO) home loans have been extremely popular with investors over the past decade as property values have soared, so let’s have closer look at them in the context of what might possibly be gained (or saved) between the different fixed and variable rates on offer across the market.
Running the numbers on Fixed vs Variable (Right Now)
Having a quick scan at the broader market for comparison rates on standard variable interest-only investment home loans revealed there were around 10-12 products available which were priced under 4.4% p.a. Rates were as high as 6.75% p.a, which highlights the importance of being vigilant and staying aware of the rates on offer across the broader market.
In looking at the same search criteria but for three-year fixed loans, you might be surprised to discover there were around seven or eight loans priced under 4.45% p.a. (while others ran as high as 6.33% p.a). There was also around the same number of loans under that 4.45%p.a mark for the two-year fixed category.
So if you believe interest rates are going to rise in the near to medium future (as many individual lending providers have already started to display), there are indeed good options available for you to fix your investment loan for two or three years at around the same price as some of the leading standard variable IO rates currently on offer.
The comparison rates on offer from the ‘big four’ lenders within the same three-year fixed loan IO category were substantially higher, and ranged from 5.27% p.a. to 6.00% p.a., which is a significant premium on what is available from some of the sharper lenders in the rest of the market.
Interestingly, the best-priced option from the ‘big four’ banks was part of a package deal.
Which brings up another option worth considering if you are looking to fix your home loan rate in this current market. There are some very good fixed rate deals available within home loan packages that target not only your investment property, but also the home that you live in (i.e. owner-occupied).
Whilst it might require a little bit more organising on your behalf to bring a second loan across to a new lending provider, lenders, who are effectively ‘winning’ two new loans for the price of one (given their acquisition costs) will often make it worth your while with great rates for both. Some may even let you fix one of your loans whilst letting you keep the other on a variable basis within the same package.
How to decide
At the end of the day, making a decision on whether to fix your home loan or not comes down to both your motivation to save and your appetite to take a chance that you’ll guess correctly on rate movements. One of the primary drivers of people who fix their loans is to achieve a level of certainty around how much they will have to ‘pay’ each month to service their loan (as opposed to trying to get the best interest rate on offer). This is particularly evident in the investment market.
For others, it is about trying to beat the lenders at their own game and securing a rate which will prove to be cheaper than the prevailing variable rates of the time.
Whichever factor drives you, the one thing for certain is the importance of staying abreast of the changes occurring in the market so that you can take positive proactive action at the right time to optimise your home loan rate and save money.
Investment home loans
Rates as low as 3.19%
Savings.com.au’s two cents
- If rates go up in the future, fixing your interest rate now can save you money on your monthly repayments.
- Because many two and three-year fixed rates for investors are nearly the same as some of the current variable rates on the market – there is virtually no money risk in fixing (normally fixed interest rates are higher than variable rates).
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.