The February rate rises are likely to be just the start of a wild rate ride this year, so existing borrowers can’t afford to sit politely with their hands in laps.
Since the Reserve bank
announced that it would leave the cash rate at 4.25% earlier this month, 14 banks and eight non-bank lenders have raised their variable rates by an average of 10 basis points.
If you had a $300,000 mortgage over 25 years, this would mean an additional $19 per month in repayments.
RBA Governor Glenn Stevens defended the lenders’ rate rises, citing the higher funding costs facing Aussie banks. Damian Smith, CEO of RateCity says this is the first time the banks have moved in the opposite direction to the RBA, and will probably get away with it.
According to RateCity, it would take about 20,000 borrowers to leave the Big Four before those banks would consider dropping their variable rates.
“This is an unprecedented time of volatility ahead. People normally get complacent after they’ve secured a home loan, but borrowers can’t afford to do that this year”, says Smith.
The fixed-rate story
However, the picture is more intriguing when you examine fixed-rate products. Smith notes nine lenders have increased rates on their three-year fixed loans whilst five lenders cut their rates.
“Despite these increases, three-year fixed rates are still at very low levels – perhaps the lowest they’ve been for the last three years. They remain highly competitive against variable rates, and offer borrowers certainty of rates and repayment levels”, says Smith.
The best three-year fixed loan at the moment is offered by MyRate at a comparison rate of 6.27%.
Fixed-rate products currently look more attractive but Smith says these types of loans have less features and obviously won’t allow you to take advantage of potential rate cuts in the future. The rate can also revert to a higher variable level after the fixed period.
So when should you consider refinancing?
Aussie borrowers are clearly not afraid of moving to another lender. Last year, the number of customers who refinanced their mortgages was 15% higher than 2010 – partly helped by the Federal Government’s ban on exit fees on new loans in July.
Smith says the latest rate rises alone don’t necessitate a loan switch, unless you’re with one of the Big Four banks who have always had a higher absolute rate than the non-bank lenders.
It’s also important to look at your own situation first: how much equity you currently hold in your home and how much your property is valued.
“If your property has been devalued since you purchased it, the relative amount of equity you held would have fallen, which could make it difficult to put down a sufficient deposit for a new loan”, says Smith.
In addition to comparison rates, exit fees (which still apply on some loan products), features and upfront fees need to be compared between your current and potential loans, to ensure that jumping ship is a worthwhile move.
In terms of variable rates, the Dream Loan Express Variable by loans.com.au currently has the lowest comparison rate of 6.31%. It offers a redraw facility, a split loan option and a mortgage offset account.
-- By Stephanie Hanna
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan