Fixed rates expose borrower 'vulnerability'

Borrowers who opt for three-year fixed rate home loans have a paltry 30% chance of saving money, according to data compiled over 20 years



Australian financial comparison site RateCity claims borrowers have historically been better off with an average variable home loan rate, compared to the average three-year fixed rate.

According to a study carried out by the site, borrowers only had a 30% chance  of saving money by fixing for three years in any given month between 1990 and 2010.

Borrowers were also likely to save more money by staying with average variable rates compared to average three-year fixed rates.

The study calculated the total monthly repayments in three-year periods for a $300,000 mortgage with a 30-year loan term and compared average variable rates with average three-year fixed rates and found that borrowers who fixed for three years at the average rate could have missed out on up to $30,000 in savings from rate cuts during the three years for a $300,000 home loan.

#pb# In contrast, the most borrowers with this loan size could have saved by fixing was less than $9000.

Michelle Hutchison, spokesperson for RateCity, says the study shows the ‘vulnerability’ borrowers face when locking in a fixed rate home loan.

"As the RateCity study shows, variable rates were 0.29 percentage points lower on average than three-year fixed rates over the past 20 years. Borrowers have to be particularly savvy and time it right to save money by fixing your mortgage, as it's more likely that you will lose out by fixing. Borrowers need to be careful and only fix if you are confident of your timing or feel you really need to avoid rising rates.”

Hutchison says borrowers also need to consider the range of interest rates available.

“Whether you're comparing variable or fixed rates, there is a big difference between what lenders offer…For instance, the difference between the lowest and highest variable rates in RateCity's database (excluding introductory loans) is almost 2 percentage points. This could mean a difference of $369 per month or over $4000 every year for a $300,000 home loan with a 30-year term."

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