Should I get a fixed or floating mortgage? Or, Should I Refinance?

Interest rates declined in the few years prior to the beginning of the COVID-19 pandemic, and even further since. Rightly, we are asked by clients “Should I fix my current variable loan or keep the floating rate?” In the context that rates will be lower for longer, perhaps the further, better question could be “Should I refinance my loan to access more favourable terms?”

Whilst the desire to stimulate economic activity has driven official interest rate policy, an event impacting rates that is likely not on your radar is the nation’s savings rate.

Read on to learn how you can save tens of thousands of dollars over the life of your loan.

A consequence of the uncertainty generated by COVID-19 has been increased household savings. Savings were 18.9 per cent in the June quarter this year, compared to 5.3 per cent in January 2020 when the pandemic started to surface, according to Australian Bureau of Statistics (ABS) data.

It has led to an influx of funds to banks from higher savings deposited by customers, and the banks need to deploy those funds to generate earnings. A premium channel for lenders is mortgages, as it creates a long term income stream and has capacity to soak up significant amounts of increased savings.

It means there is a lot of competition for customer’s business, which is great news if you’re looking for a loan, and particularly a large loan like a mortgage.

Its adds to the brightening outlook for those seeking to buy or refinance residential property for these reasons:

  • The summer period is a good time of the year to sell a home, adding to stock on the market
  • House sales were subdued during the worst of the pandemic, so there is a build-up of sellers.
  • House prices are trending upwards again but have not reached average prices pre-pandemic.
  • Led by NSW, some state governments are reviewing how stamp duty can be applied in a more flexible way for home buyers.
  • Interest rates are at an historical low and mortgage providers are offering competitive rates resulting in substantial savings for borrowers.

The last point raises the issue – should you get a fixed or floating mortgage?

Each has advantages, and fixed rates at some institutions have recently fallen below 2 per cent for the first time ever!

A fixed loan means you know the interest rate you will have over the fixed period of the loan, providing certainty over the payments that will be required. You also benefit if interest rates rise, as your repayments remain the same.

Floating loans mean your interest rate can vary if official interest rates set by the Reserve Bank of Australia rise or fall. A change is not guaranteed, as it will depend on others things like a bank’s funding costs. Generally, floating rate loans are a good idea if you think interest rates are going to fall, as it will likely result in a reduction on your loan repayments.

Typically, you will choose to fix or float a loan for a term of 6 months to five years, even if your mortgage term is 30 years. At the end of term you can again decide which option will suit you best, meaning you can take advantage of changed economic or personal circumstances. Depending on your provider, you may also be able to split your loan into portions of both fixed and floating.

Generally, people get a fixed term if they believe interest rates are going to rise, or they simply prefer the security of knowing how much their payments will be.

Source: Bank’ websites, CANSTAR, RBA, Refinitiv – *available to owner-occupiers

Floating rates are better suited if you think official interest rates are going to fall, as you will expect to get a lower rate on your loan if the RBA cuts rates, although it will also depend on other things like your providers funding costs, and a cut is not guaranteed.

Source: APRA, banks’ websites, CANSTAR, RBA, Securitisation System

Currently we are in an unusual space. In order to provide some stability in a period of considerable uncertainty, the RBA has made it clear in numerous speeches that it does not expect to cut interest rates past the present historic low of 0.1 per cent, but also it does not expect to raise rates until at least late 2023.

The RBA’s commentary cannot be taken as certain, as it will respond to any unexpected changes to market conditions, but it does provide a high degree of guidance.

The conundrum for those with or seeking a new mortgage or to refinance is if rates are unlikely to rise or fall, do you fix or float?

There is no set answer to that question, because if security is most important to you it may be the over-riding consideration to fix. For others, the slightly lower rate lenders normally provide with floating rates may be the primary consideration.

What we know without question is that interest rates have never been lower and competition amongst providers is high, putting you in the driver’s seat to get a great rate if seeking a home loan or to refinance an existing loan.

We also know it’s highly unlikely official rates will change anytime soon, so you can take the time to consider what type of loan will suit you best.

We can help you consider your needs and situation to identify the best loan structure and lender. Contact us today to undertake a loan review.

Ph 1 300 009 888 or email service@holzworth.com.au.

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