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Money markets are expecting interest rates to rise by more than 1.5 percentage points within a year after the Reserve Bank of Australia (RBA) governor Glenn Stevens said yesterday that the economy had proved much stronger than expected.
Despite expectations of rising interest rates, financial comparison website www.RateCity.com.au has advised borrowers to stick to variable rate home loans.
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According to RateCity, the market is expecting interest rates to rise by up to 2 percent gradually over the next five years, which would take the average standard variable interest rate from 5.25 percent to 7.25 percent.
Research by the group found that by factoring in the expected variable rate rises for a home loan of $275,000, the total interest paid over the five year period would be $85,185.
Compared to locking in a fixed rate now for the next five years, which is currently averaging 7.25 percent, total interest paid during the five years would be $95,753, RateCity has claimed.
“By choosing to stay with the variable rate rather than a fixed, mortgagees could potentially save $10,568 of interest with about the same amount of debt paid off the loan,” RateCity’s consumer advocate Michelle Hutchison said.
Mortgage Choice senior corporate affairs manager Kristy Sheppard said borrowers should consider their unique financial situation, lifestyle and needs before deciding on a fixed, variable or split home loan.
“An important thought is that fixed interest loans for a term of three years or more have noticeably higher rates than variable loans. Say a borrower begins paying an extra 125 percentage points to fix their loan, that can easily mean $200 extra per month in repayments,” Ms Sheppard said.
“The decision will come down to how much they value a guaranteed, steady repayment level and where they think variable interest rates are headed.”
