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3 year fixed versus variable comparison August 2019

You have heard it before, many, many times before (so we shall keep it short) from brokers to branch lending experts to the media - applying for a home loan requires making many decisions ... most borrowers struggle with the decision to fix or not to fix ... banks always win when you fix your home loan interest rate ... you have limited extra repayments ... you cannot use the redraw facility ... you do not have an offset account during the fixed period ... and so on.

And when you ask for advice the answer is almost always 'half fixed, half variable'. Great advice huh!

 

But did you know that there are lenders (mostly customer owned) that have unlimited extra repayments without break costs, redraw or offset facilities or both on their fixed rate loans?

 

Did you also know that you can quantify and chart the performance of fixed interest rates versus variable interest rates over time?

 

Chart Definitions

Red line is the variable interest rate applicable at that point in time.

Green line is the 3-year fixed rate applicable at that point in time.

Blue line is the variable interest rate paid at that point in time over the comparison term of 3 years based on the actual variable interest rate applicable over that term.

 

Therefore, if at that point in time, the green line is below the blue line then you would have been better off fixing your loan for a term of 3 years. The difference between the green and blue lines is the perceived savings (if the green line is below blue line) and vice a versa.

 

 

Current 3 year fixed and variable interest rates

The difference between the median home loan variable interest rate (approximately 3.23%) and the 3 -year fixed interest rate (3.03%) is 0.20% or the equivalent of a 0.25% reduction in official interest rates by the Reserve Bank from 1.00% (today's official cash rate) to 0.75%.

 

Do you fix now or wait? Usually lenders are slow to reduce their fixed interest rates after the Reserve Bank cuts the official cash rate (and we had a 0.50% reduction in 2 months) so it may be better to monitor what the lenders do. If you cannot wait then you may consider fixing if you believe that the Reserve Bank will not cut interest rates to 0.50% or lower (from 1.00% today).

 

Aug 5th, 2019
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