Is it better to have a fixed or variable home loan in 2016?
A common question clients ask when taking out a home loan or looking to refinance their home loan is: Should I fix my home loan? or Is it better to have a fixed or variable home loan in 2016?
Sometimes what the client really wants to know is: Will interest rates increase in 2016 or the next few years?
Nigel Abery (PhD), Principal Mortgage Broker at Oak Laurel.
What influences interest rates?
It is not really possible to know with any amount of certainty if interest rates will increase, remain the same or decrease in the short and medium term. There are many factors that can influence both the Reserve Bank of Australia’s cash rate and the bank or lender mortgage rates.
The factors that the Reserve Bank of Australia board consider when setting the cash rate are contained in the RBA Governor Glenn Stevens’ statement that is provided after each meeting. Some of the reasons for these changes are stated with some commentary about the RBA decisions in other articles on this site. The RBA decisions mainly revolve around global and domestic economic conditions and inflation (including house prices).
The bank and lender interest rate are influenced by the RBA cash rate, other cost of obtaining and providing finance, Government regulation (banks and lenders change their interest rates in order to encourage or discourage certain types of borrowers) and the risk of lending (this can be risk of lending to a certain type of borrower or due to other conditions such as higher risk locations or property types). Banks and lenders can also manage these types of risks by increasing the deposit or equity required.
Why fix you mortgage interest rate?
There are a few main reasons that you may want to fix your mortgage interest rate:
- If the fixed rate loan has a lower rate than the variable interest rate alternatives.
- If you want to be sure that your payments will remain at the fixed rate level for a certain period of time.
- If you think that interest rates will increase and you will be paying less by fixing your interest rate.
Why have a variable mortgage interest rate?
There are a few main reasons that you may want to have a variable mortgage interest rate:
- If the variable interest rate is lower than the alternative fixed rate (similar to the above but in reverse).
- If you want flexibility to make extra payments or repay or refinance the loan without paying a break fee penalty. Note that some fixed rate mortgages allow substantial amounts of extra repayments.
- If you think that interest rates will go down and you will be paying less by having a variable interest rate.
Which is better, a fixed or variable rate loan in 2016?
Assuming that you don’t need the flexibility to make extra payments or the certainty your payments will not increase, the question really becomes do you think that bank or lender mortgage interest rates will increase in 2016.
Though it is difficult to predict, I suggest that we may be at or near the lowest interest rates that we will see in the short to medium term. This is because of a number of reasons:
- The RBA has stopped indicating that they may cut and now have made more undecided statements that the cash rate could go either way.
- Lenders, mostly banks have had extra regulatory burden placed on them and are becoming more risk averse and are pricing more risk into their rates.
- Interest rates are already very low and the RBA can only cut so much without being cornered without even being able to threaten a cut. The RBA often talks about cutting the cash rate in an attempt to stimulate spending and the economy without the need to actually cut rates, this is called jawboning.
- I am an optimist and believe that the economy will improve.
Disclaimer: nobody can predict with certainty what will happen to interest rates. This is not considered as financial advice!
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