While the Reserve Bank has made strong indications to Australian’s that interest rates will not be raised until 2024, we’re starting to hear rumblings from the banks to indicate this could be different for fixed interest rates.
If you’re in the market for a home and mortgage, it’s essential to understand key market movements and what it means for your circumstances. The difference between fixed and variable interest rates could be thousands of dollars. At Astute, we want that amount to be well and truly in your favour.
As a result of the recession and as a way to stimulate spending in the Australian economy, the Reserve Bank has kept interest rates low. During the pandemic, the financial impacts on millions of Australians saw many banks follow suit and pass on those interest rate cuts to the end customer. They aren’t legally obligated to do this, and their views on the market appear to be changing. That said, the bond markets primarily drive the cost of fixed interest.
The CBA recently announced an increase to its 3-year rate. Given it’s one of the first increases by a major bank, it’s perhaps signalling those further changes could be on the horizon.
According to Peter Switzer of Switzer Daily, “The problem is that the economy is rebounding strongly and the country’s banks have only $90 billion left in cheap credit provided by the RBA via what’s called the Term Funding Facility (TFF) to soften the blow of the Coronavirus. A strong economy and surging property prices mean there’s a big demand for loans, and without this cheap loan money, experts are warning that fixed interest rates will rise.”
In acknowledgement that this is a possible scenario, we’re taking a closer look at a Fixed Interest Rate vs a Variable interest rate. Because they each have different pros and cons, we thought it worth summarising the difference between Fixed and Variable interest rates.
Fixed Interest Rate
This is essentially an agreement with the bank that you will pay a set interest for an agreed period. It can be a good time to consider a fixed rate if the market is low. However, as it’s an agreement, it can also come with strict terms which can be a challenge if your circumstances change.
Benefits
You will have a greater level of certainty over monthly repayments.
A Fixed Interest rate allows the setting of a more accurate budget.
If interest rates rise, a low fixed rate means repayments could be less than the variable market rate.
Downsides
You could be locked into the rate even if rates decrease.
You could be penalised for making additional payments.
A fixed interest rate could have expensive break fees for adjusting or selling your home within the mortgage term.
Variable Interest Rate
A variable interest rate allows you to pay a different interest on your loan based on what the banks set (often guided by the Reserve Bank). It’s often influenced, and changes based on the economic situation and comes with a much greater degree of flexibility should you decide to sell your home or pay your loan off sooner.
Benefits
● Allows for increased repayments during the loan term
● You’ll pay less if the interest rates are reduced
● Could include a redraw facility/ offset account
Downsides
● Provide less certainty of loan repayment costs
● You’ll pay more if interest rates increase
The majority of Australian’s tend to opt for a variable interest rate when financing their homes due to the greater flexibility it provides. At Astute, we’ll consider the most suitable loan structure to meet your needs and offer easy-to-understand options to you. We could even split the loan.
What is a Split Loan?
A split loan is a loan that allows you to utilise a portion of debt against a fixed interest rate and another portion against a variable interest rate. Most banks will offer a Split Loan option; however, not all lenders offer this across all their products.
We will always work with you on a case-by-case basis as no two financial situations are the same and should include careful consideration by a mortgage specialist.
Benefits
● Flexibility over which portion of the loan to split
● Security against a highly variable market
● More features such as an offset account
Downsides
● Complexity and cost as there could be additional fees
● Less clarity over budgeting
● Not all home loans can be split, so less home loan product to choose from
We hope this breakdown of fixed vs variable interest rates has been helpful to you. If you’d like more information, we invite you to reach out as we’re always happy to have a chat and understand your situation a little better. To learn more about the risks and benefits involved with each loan, please see our risk/benefit statements below. We’ll be glad to run the numbers and provide recommendations specific to your circumstances. Importantly, we’re there to help simplify the process for you.
Astute Financial Management Pty Ltd | ACN 093 587 010 | Australian Credit Licence 364253 | Davgan Insurance & Wealth Pty. Ltd. T/As Astute East Brisbane Corporate Authorised Representative (425641) of Alliance Wealth Pty Ltd | ABN 93 161 647 007 | AFSL 449221. www.centrepointalliance.com.au/aw | General Insurance provided by Astute Insurance Pty Ltd | ABN 59 622 582 236 | Authorised Representative of Ausure Pty Ltd ABN 94 096 971 854 AFSL 238433. Health Insurance products are underwritten by St Luke’s Medical and Hospital Benefits Association ACN 009 479 618 (St.LukesHealth), a registered private health insurer, [trading as Astute Simplicity Health] and members are introduced by Astute Financial Management Pty Ltd or related entities (collectively known as Astute) for which Astute receives a commission.
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