Introduction

They say all good things must come to an end… and that includes your home loan fixed interest rate period.

If your fixed rate expiry is coming up, you might have started to think about what happens next and what action you need to take.

Or you might be sticking your head in the sand and avoiding the topic entirely. Be warned! The worst thing you can do is take no action at all.

Introduction

Australians have enjoyed record low home loan rates for around a decade now, so for many of us, a mortgage has been a set-and-forget proposition.

Recently though, the Reserve Bank of Australia (RBA) has increased interest rates. This has prompted many borrowers to convert to a fixed rate loan without properly revising their current situation.

A typical mortgage has a variable interest rate which fluctuates up or down with interest rate movements. Accordingly, your payments go up and down too.

Introduction

Buying a home is one of the most significant decisions a person makes. In a modern landscape where the ratio of homeowners to renters decreases, the emphasis on making an informed financial decision like buying a home is amplified.

Even so, most homeowners don’t consider what home loan rates they are paying. A recent survey conducted on 1,000 Australians suggests that 55% of Australians don’t know their mortgage rate.

The financial implications for the homeowner can be detrimental. A homeowner could be paying double the interest with an interest rate increase as low as 2%.

Introduction

While we understand banks charge interest on their home loans, exactly what determines the rate? Should we be worried that interest rates will spike higher in the years ahead?

For most people, it's all a bit of a puzzle.

Traditionally, the Reserve Bank of Australia (RBA) is tasked with the responsibility of setting interest rates. It does this at monthly board meetings by determining the so-called cash rate, or the price the big retail banks pay to borrow money in the overnight cash markets.

Introduction

It’s hard to imagine taking out a home loan with an interest rate of 17% per annum or higher, yet that was the reality for homebuyers in the late 1980s and early 1990s. And back then it would have been just as hard to imagine home loan interest rates of less than 3% p.a.

The point is, ultra-low interest rates are not the norm, and while it might be tempting to load up on debt when interest rates are very low, it’s important to understand what can happen to loan affordability when interest rates rise.

Introduction

The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases they are being reactive rather than proactive.

A wide range of external factors feed into their decision-making process, including, in no small part, our collective behaviour as investors and savers, borrowers and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas.

Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.

Introduction

It goes without saying that homebuyers love low interest rates. The lower the interest rate the less the mortgage repayments on a particular house, right?

Well, maybe.

Lower interest rates also mean borrowers can service a bigger loan. In a competitive housing market that can push up prices, as we have witnessed this past decade.

So what’s really going on? Have low interest rates been good or bad for homebuyers?

The numbers crunched...

Introduction

With so much uncertainty surrounding who now has more control over setting mortgage interest rates - the Reserve Bank or the banks - it is timely to think about your loans and whether they are structured to suit your needs into the future. One of the most obvious considerations for your home mortgage is whether a fixed or variable rate loan is best for you.