The Reserve Bank of Australia resolved to raise the nation’s official interest rate for the first time in 11 years by 25 basis points, from 0.1 per cent to 0.35 per cent. The rate rise was announced in response to skyrocketing inflation, which has reached an annual rate of 5.1 per cent and has sent prices climbing at the fastest rate in two decades.
The top 4 Banks (ANZ, CBA, NAB and Westpac) have announced they will be passing on the full rate increase of 0.25% to their customers.
How will a rate change affect my variable home loan?
Based on an owner-occupier paying principal and interest with 25 years remaining on the average variable rate of 2.92% assuming the banks pass the cash rate hike on in full:
Fixed Rates vs Variable – Do I need to change my loan structure?
In response to the media around interest rate rises a lot of our clients have been asking us if they should fix SOME of their Home Loan or MORE of their Home Loan (if they already have a portion of their loan fixed).
This is a great question.
Based on a 30 year loan term, the variable rate will generally outperform the fixed rate.
Current Owner Occupied variable interest rates at 80% Loan to Value Ratio (LVR), Principle & Interest are generally sitting at between 2-3% depending on the lender.
In comparison, the current 2 and 3 year fixed rates are currently sitting at between 3.5% to 4.5% depending on the lender (guide only). Given the fixed rate is a forecast of what lenders think will happen, you will notice that they have already factored in the rate increases.
Fixed rates aren’t about ‘winning’ or ‘losing’ in comparison to the variable rate, but rather about creating certainty in repayments and allowing you to budget.
As mentioned, over a 30 year period the variable rate will generally outperform the fixed rate, so the decision to fix is an emotional decision and based around your risk tolerance.
Given variable rates are currently lower than the fixed rate, if fixing now, you are essentially paying a premium on the interest rate, to give yourself certainty against future interest rate rises. Depending on you risk appetite, this may be worthwhile. Alternatively you may consider fixing just a portion of your Home Loan (vs all of your Home Loan) to hedge against the future rate rises.
Also, please keep in mind that majority of the lenders do not allow a 100% offset against a Fixed Rate Home Loan (some exceptions do apply).
You can use this handy Excel Calculator to forecast repayments and interest with various interest rate changes.