Fixed rates expose borrower 'vulnerability'

by Mackenzie McCarty25 Feb 2013
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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  • by QLD BROKER 25/02/2013 10:11:05 AM

    Does it not make a difference "when" you fix. Yes clients who fixed on 7% or above during that time may have paid more - but with rates at 5.19% 3 years - historically these are pretty good and close to bottom of where they may go don't you think? Horses for courses - each client is different - but for me Fixed rates right now are pretty appealing over 3 years.

  • by Justin 25/02/2013 11:42:22 AM

    Agree QLD Broker. And surely knowing what your repayments are for a fixed period is worth something. I just fixed 2/3rds of my loan at 5.29% for 3 years and don't care if it goes down further, at least I know I can comfortably pay extra.

  • by NoTimeLikeTheFuture 25/02/2013 12:02:46 PM

    This confirms what I suspect i.e. banks know more than consumers - and they price fixed rates accordingly.

    I think we're best off fixing for emotional / security reasons and not to make money, as we can't expect to know more than the banks.

    If servicing is strong then variable probably leads to the best outcome (as this study indicates) - and variable loan has offset to boot.