Home loan customers should steer clear of fixing their interest rate

ANALYSIS: As the RBA left the cash rate on hold today, experts say home loan customers have four good reasons to steer clear of fixing interest rates.

HOME loan customers looking to fix their loans are betting against the odds and could end up costing themselves more.

The Reserve Bank of Australia has kept the cash rate on hold at 1.5 per cent again for the 14th consecutive month — it has not budged since August 2016.

So for savvy owner occupiers borrowers paying both principal and interest and looking to save themselves a bundle of cash, here’s why there’s no need to fix your loan anytime soon.

1. Variable rates are lower than fixed rates

New analysis by financial services firm Canstar has shown for OO P & I loans the lowest standard variable rate on the market is 3.39 per cent.

Compare this to 1, 2 and 3 year fixed rate deals and they will all cost the borrower more — the lowest deals are 3.49 per cent, 3.65 per cent and 3.69 per cent respectively.
This is causing borrowers to steer clear of fixing their loans, Home Loan Experts managing director Otto Dargan said.
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Home Loan Experts' managing director Otto Dargan said there’s some great variable rate deals.

“Many economists are predicting a longer period of low rates and many banks are offering specials on variable rate home loans,’’ he said.

While fixed rates give customers that certainty of knowing their rate for a set period, it’s no sure bet that variable rates won’t fall lower and fixers miss out on potential savings.

2. Cash rate won’t move until 2019

Borrowers have seen in recent years home loan interest rates can move regardless of whether the cash rate goes up or down, but some industry experts including Westpac economist Bill Evans have remained adamant there will be no cash rate move in 2017 or 2018.

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So borrowers this means variable rates will be unlikely to take an upwards surge anytime soon.

Enjoy the rock-bottom variable rates while you can.

Many home loan deals are below the four per cent mark so borrowers should be aiming for loans with a “3” in front.

Canstar’s database shows more than half of all home loans available with a rate under four per cent have an offset account attached which also helps customers save if they park cash in this account.

3. Some lenders are still dropping variable rates

Home loan rates are continuing to move downwards — just last week ANZ increased one of its popular home loan products’ discount by 4 basis points, giving borrowers savings.

Multiple other lenders have done the same in the past month too.

ANZ increased the discount for home loan customers with a Simplicity Plus loan.

Banks are hungrier than ever for your business so it really does pay to shop around or demand a better deal from your existing lender.

A good trick is to see what your lender is offering new customers and if you’re not getting the same rate, demand it or threaten to leave.

Chances are they’ll come to the party.

4. Pay extra and use your offset account

The benefit of having a variable loan means you can pay as much extra as you like on your loan and you won’t be penalised.

You can also park money in an offset account on many of these loans and save on interest.

An offset account is a daily transaction account linked to the mortgage and reduces interest costs.

If you have a $300,000 loan and $10,000 in the offset account you will only pay interest on $290,000.

Canstar’s group executive of financial services Steve Mickenbecker said fixed rate loans can be quite restrictive and don’t always allow for extra repayments or the use of an offset account to reduce interest charges.

Canstar's group executive financial services Steve Mickenbecker urges borrowers to make extra repayments and take advantage of offset accounts.

“The benefits of making extra repayments can save significant amount in interest over the life of the loan and repay the loan sooner,’’ he said.

“Using the average rate of 3.76 per cent (of Canstar’s five-star products) and an average loan amount of $350,000, by adding an extra $100 to your monthly repayment can see you save almost $18,000 in interest over the life of the loan and you will pay off your loan two years earlier.”

So in short borrowers, the experts believe there’s no need to rush in and fix your rate.

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@sophieelsworth