Those who stick to their variable rate mortgage now only to see their interest rate increase by 2 percentage points would end up paying over $ 900 more per month in repayments on a $ 800,000 loan over 30 years , according to Canstar figures.
âWe are at the bottom of the interest rate cycle and homebuyers are unlikely to see a general drop in mortgage rates from here; although there will be lenders who will continue to reduce their mortgage interest rates by small amounts, âhe says.
The average variable rate mortgage listed on Canstar’s website is 3.22 percent, compared to a 3-year fixed rate of 2.24 percent and a 5-year fixed rate of 2.75 percent.
Mickenbecker says a variable rate borrower could fix for a 2-3 year term now and lock in the interest rate savings, but he would likely end the fixed rate term as rates rise.
A borrower could also take a longer-term view and lock in a 5-year fixed rate now, but pay more interest, on average, than someone who takes a 3-year fixed rate.
However, they could end up locking in a relatively good rate for two years or more after the time the official cash rate starts to rise, he says. âWhatever strategy borrowers choose, they need to make sure they get a good rate,â says Mickenbecker.
Correct the pros and cons
Those who have rushed to fix their mortgage interest rates in the past have often had their fingers burned as official rates and variable rate mortgage rates have been cut.
However, with a liquidity rate at an all-time high of 0.1%, the chances of getting caught fixing now are much lower than in the past, Mickenbecker says.
Still, he says fixed rate mortgages often have fewer bells and whistles than adjustable rate mortgages. âMost fixed rate mortgages don’t have clearing accounts, but some [facilities]” he says.
The savings held in the clearing account reduce the mortgage, and therefore the amount of interest paid. A withdrawal facility allows you to withdraw any additional refunds you make.
Exiting a fixed rate mortgage sooner could mean paying a substantial “break-down” cost to the lender, which is the economic cost to the lender of having to lend money again at a rate of. lower interest.
However, since interest rates will likely only rise from here, there aren’t many incentives to get out of a fixed-rate mortgage sooner, Mickenbecker says.