There's no easy fix on home loans

By Alex Tilbury, News Limited newspapers, 2 November 2009

VARIABLE rate home loans are expected to rise again this week but research has found they still beat fixed rates hands down.

With a Melbourne Cup day rate rise a near certainty, consumer finance experts say it is too late to switch to fixed rates, which have been sneaking up all year.

Your Money last week asked RateCity to crunch the numbers and it found you would have been $3,250 better off if you had taken out a $300,000 mortgage on a variable rate five years ago, compared with a fixed rate.

For the past three years, you would have been $1,400 better off with a variable rate. Repayments on a $300,000 loan taken out in October 2004, on the average five-year fixed rate of 7.21 per cent, were $129,660. Repayments on the average variable rate in those five years were $126,408.

RateCity CEO Damian Smith says it is best to accelerate your repayments.

"By adding $180 to your monthly repayments on a $300,000 loan, you will not feel the next 1 per cent in rate rises and reduce your loan size," he says.

But fixed rates can provide certainty. In Australia, 85 per cent of mortgages are variable loans compared with 20 per cent in the US. While variable rates are influenced by the official cash rate, fixed rate pricing is driven by wholesale money markets.

Fixed home loan rates are currently near 7 per cent, versus 6.03 per cent for the average standard variable rate of the four major banks.

Resi Mortgage Corporation consumer advocate Lisa Montgomery says it's now too late to fix.

"The horse has well and truly bolted and the gate has shut," she says.

"Fixed rates are now significantly higher than the variable rate that most people are enjoying.

"If you are looking at fixing at over 7 per cent, use a home loan calculator first and work out the repayment and then start paying that amount off your loan to create a buffer rather than lock yourself into a contract."

Queensland Teachers' Credit Union chief executive Mike Murphy says there is now a 1.2 percentage point difference between variable and fixed for three years.

"It would be prudent to negotiate a discount on variable or fix some or your entire loan for three years, provided the differential is not more than 1.5 per cent to 2 per cent," he says.