Variable rate home mortgage loans among highest takeup in the world

Australians have indulged in a long running love affair with variable rate home mortgage loans, but as times get tougher is it time to fix or split?
The Reserve Bank has just raised the official cash rate by 25 basis points to 6.75 per cent - meaning the standard variable home mortgage loan rate is likely to rise to 8.57 per cent.
Fixing home loan rates can provide certainty about repayments and insure borrowers against future rate rises. On the flip side if rates fall, borrowers can be stuck with a high rate. Splitting a home loan gives borrowers a foot in both camps.
Timing is everything
Even the experts are reluctant to commit one way or another about fixing home loan rates, but in some circumstances splitting your mortgage into fixed and variable portions makes sense.
Shane Oliver, chief economist at AMP Capital Investors, says people who are on the brink of mortgage stress should think about splitting their home loan into fixed and floating portions as a way to make sure they don’t lose their house.
“If you’re at a point where you absolutely can’t afford another interest rate rise or it will tip you over the edge into default then having a fixed rate is a good way to cover it.”
Dr Oliver says while there’s a slight advantage in being fixed at the moment people still need to think ahead to where variable rates might be in a year’s time. He thinks the Reserve Bank is almost done with rate rises, meaning rates could come down over the course of a fixed term home loan.
Although Dr Oliver thinks further rate rises are unlikely, he warns economists have been picking the end of rate hikes for the past couple of years.
“The peak of the cycle has turned out to be a lot higher than people anticipated a couple of years ago, so there still is a risk that maybe we’ll be surprised on the upside and banks will have to continue raising the variable rate.”
Saul Eslake, chief economist at ANZ, thinks there could be two more rate rises in the pipeline, and agrees it makes sense for people to think about fixing at least part of their home loan.
“But people contemplating that need to be very confident about their future income and cashflows, both on the upside and the downside.”
If a homeowner’s circumstances change for the worse they may struggle to meet repayments, and if their circumstances improve they will be penalised for increasing payments.
“Because interest payments on mortgages are not tax deductible people have a strong incentive to pay it off as quickly as possible, including by using any money which happens to come into their hands unexpectedly – from a bonus, a win on the lottery, a pay rise or even from interest rates going down. Fixed rates exclude you from doing that," Mr Eslake said.
Fixed versus variable
A recent survey by mortgage provider QuickDirect found that 83 per cent of people with a fixed rate home loan ended up worse off then their counterparts. But quite a few NEWS.com.au readers disagreed with these findings.
“Worse off? How?” asked one reader. “Mine is locked in for five years on 7.79 per cent with the option of uncapped repayments, and a mortgage offset account. Just as long as I don't pay the entire loan off in five years.”
This view was echoed by another reader.
“In late 2002 I fixed a home loan at 5.9 per cent for 5 years ... this was taken out just before rates started to rise again . It will expire at the end of this year .Who has that rate nowadays? This has helped immensely in reducing the principal considering that we have been making regular extra repayments.”
While some readers liked the flexibility of being able to make extra repayments with a variable rate, others wanted the certainty of fixed rate loans.
“Last week I divided my loan into part variable part fixed for 3 years. This allows me the option of still having a redraw and to make extra payments while the bulk of my loan won't be touched by the rises,” a reader from Tasmania said.
While in most instances extra-repayments are not possible or are penalised on a fixed rate loan, in a rising interest rate environment, some banks and lenders will allow borrowers to make extra payments, if their fixed rate is lower than the market rate.
Australian fixation
According to the Reserve Bank of Australia over 80 per cent of home loans are on a variable rate.
Only Britain has a similar proportion of variable versus fixed rates.
Fixed rate loans were around in Australia in the 1960s but disappeared during a time of high interest rates. They were reintroduced to the market in the late 1980s at a time when variable rates were as high as 17.5 per cent. Home owners who fixed their home loans at between 13.5 and 15.5 per cent won out in the short term, but were burnt when variable rates then fell rapidly.
Before today's hike the major banks were offering fixed rates of between 7.67 and 7.89 per cent for fixed terms of between one and three years. This was lower than the standard variable rate of 8.32 per cent, but pretty much in line with basic variable rates – which range from 7.69 per cent to 7.82 per cent. Today's hike is likely to flow through to the market within the next few weeks.
Source: Newcorp