Fixed Rate Home Loan
Personal Investment
Wednesday July 31, 1996
GOLD St George
Town & Country
SILVER Westpac
BRONZE ANZ
Fixed-interest rate loans have been overshadowed recently by the competition in variable loans between banks and mortgage providers. But fixed-interest loans have traditionally attracted a strong following, particularly with borrowers who follow the market closely. If interest rates look set to rise, locking in to a two to five year fixed rate can provide borrowers with a hedge.
But being able to predict how rates will move is beyond most people. Variable loans follow fluctuations in interest rates. They might be be higher than rates fixed a year previously, they might be lower. So choosing when to lock in to a rate takes time and confidence. About 20 per cent of borrowers are going for fixed rate loans, those borrowing to buy property, and wanting to be able to lock in costs and know how repayments will affect their cashflow.
Even if interest rates do look set to rise, and a fixed loan offers substantial interest rate savings, it's still vital that loan charges are factored into the long-term cost of the loan. Exit penalties and lump-sum repayments might attract hefty fees, so these conditions must be noted.
The horror stories of customers locking into 17 per cent fixed home loans in the 1980s may have abated, but the chance of timing the loan incorrectly still applies. For this reason we weighted rates at 60 per cent of the points, with fees at 20 per cent, and features and conditions at 20 per cent.
St George Bank improved its rank from last year, jumping from a bronze medal to take the gold. Its interest rates are not the most competitive but an overall strong range of features and flexible terms and conditions won the points. Town & Country, also winning gold, outranks all other banks on interest rates, carrying a low 8.70 per cent on its two-year fixed loan. This rate is currently being touted by some alternative lenders as the lowest variable rate on offer, so locking in to this rate offers healthy savings.
Town & Country also fared well with fees, calculated by using a one-year, $100,000 loan scenario. This gives guidelines as to the general cost of embarking on the loan, but bear in mind that early repayment penalties and other terms that may infringe on the flexibility of the loan are not included in the scenario.
Fixed loans can become more flexible when linked with a variable rate loan. Most borrowers are aware of these "honeymoon" deals where a loan package is taken out, using a substantially lower fixed rate for the first year (or sometimes two) and reverting to the variable rate after this.
Which rate to choose
1. Understand your own situation. Can you afford higher repayments if rates rise in the future? If not, consider a fixed-rate loan.
2. Work out how long you are likely to have the loan for. If you think you will repay - or refinance - the loan early, watch for early repayment penalties.
3. Have a view on interest rates. Will they go up or down? If you think rates will come down, let you loan float (take a variable loan). If you think rates could rise, consider locking in.
4. Consider your other banking needs. Is it more convenient to have all your banking in the one place?
5.. Make certain all quotes and conditions are in writing.
6. Remember that savings you make on your mortgage are real, after-tax, dollars. The right mortgage at the right price, really can save you money.
© 1996 Personal Investment