Fixed vs Variable mortgage interest rates and Julia Gillard’s hairdo
If you’ve been reading along you’ll have seen our recent series on achieving home ownership and how to buy a house. That prompted a query from one of readers, Georgia (not her real name). Georgia already has a house but asked whether it’s a good idea to look at fixing the interest rate on her mortgage or leaving it variable. Not a bad question.
Mortgage rates tend to be significantly influenced by the Reserve Bank of Australia’s official cash rate (the rate at which Aussie banks can borrow funds from the RBA). Emphasis on significant influence. ….Other factors which influence the rate at which banks lend for housing include the rates at which they borrow funds on the wholesale market from overseas; desirable profit margins; the general mood of Wayne Swan and how much pressure he applies in the press on any given day as well as how they feel about Julia Gillard’s magnificent red hairdo. Hang on, scratch that, nobody likes Julia’s hairdo…..
To answer Georgia’s question we thought we’d take an iGenWealth online poll of the economists employed by some of the major banks to see if we could help her decide. We hit a bit of a speed bump right off the bat because, unusually for a group of economists, they don’t seem able to agree…. There’s a lot of economic uncertainty out there and in a recent interview on ABC am on 1/6/2012, Bill Evans the chief economist for Westpac forecast the RBA cash rate will fall to 2.75%. NAB’s chief economist, Alan Oster disagreed, forecasting a drop to 3.25%. Shane Oliver, chief economist for AMP in his weekly market and economic update dated 22/6/2012 predicts the RBA cash rate will fall to 2.75% by year end.
Currently, by way of comparison, the RBA has the cash rate at 3.5% after a recent cut at its last board meeting. A quick poll of the four major banks shows they have standard variable mortgage rates set at an average of around 6.8%. Meanwhile, the same poll shows that on average the four majors appear to be offering fixed mortgage rates which are a bit cheaper than their standard variable rates for periods up to three years. On average, fixed interest rate offerings then spike above variable rates for periods longer than 4 years. In short, the banks appear to have already priced in future rate cuts in the short to medium term which, let’s face it no doubt includes a margin for their shareholders and is also what keeps all those economists in a job….
On that basis, we at iGenWealth think that if you’re already experiencing mortgage stress, in deep shtoom and struggling with your mortgage repayments, converting part of your loan to a fixed interest rate facility at this point might just give you a few points of wiggle room as well as providing some much needed certainty about what your repayments will be in the short to medium term. We don’t however suggest fixing 100% of the loan because, depending on the type of loan, fixed interest facilities mean that you usually can’t make ‘extra’ repayments. There may also be penalties for early repayment so you need to think carefully about the term you fix for.
On the other hand, if you’re handling things ok at the moment and the economists are correct, it seems that interest rates might be due for another haircut or two in the short to medium term (but hopefully not a Julia-esque dye job). If that turns out to be true, you might just come out in front by staying on a variable rate if the RBA decides it needs to take interest rates lower in the short to medium term.
So there you have it –
Wealth information for the iGeneration!
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By Dean Johnson
