Monday, 11 February 2008

Fixing our home loan interest rate.

With the RBA increasing its policy interest rate to 7%, and the flow on effect on the major banks increasing their interest rate by 0.30% ( which is 0.05% more than the RBA's increase), it is time for us seriously investigate fixing our home loan rate. As this table of previous rates shows, it has increased eleven times over the last six years. The article in the The Age also predicts that the interest rates is due for an increase on another four future occasions, so we are really preparing ourselves for the worsening conditions.

With the loan package that we are currently on, we are currently enjoying a 0.6% discount on the normal variable interest rate, which is below the current Fix interest rate. however the beauty of a fix interest rate is that it is fixed and won't increase in line with the predicted RBA's increases.

What factors do I need to make sure that switching over to a fix interest rate is the better way to go.
  1. The fee incurred to switch the home loan over to a fix interest rate is smaller than the savings in the interest repayments. I am pretty confident that it will be.
  2. The length of the fix interest loan will need to be carefully considered. If the length of the term is too long, we may miss the drop in th interest rate when it falls down, however i don't this is likely within the next six to seven years. If the length of the term is too short, we risk going into a higher interest rate when we exit the fix loan. We will probably be negotiating for a 3 or 4 year term.
  3. The current fee structure does not change significantly as we quite like it. We get $0 fee on any of our account at our bank, because of the home loan that we have.
  4. We are still able to pay extra into our home loan.
If the interest rate is like to increase another four times, and we are able to stay at the current rate, we are like to save about $200 per month. This is something worth striving/negotiating for.

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2 comments:

Anonymous said...

Hi there,

I think you should read this article before you rush into fixing your loan.

http://www.domain.com.au/Public/Article.aspx?id=1200419843065&index=NationalIndex&headline=Beat%20the%20banks%20at%20their%20game

~ sarah

tehnyit said...

Sarah, many thanks for pointing out that article to me. It certainly enlightening on how the banks "play" with the interest rates.

My fear is that if the interest rate on our loan increases pass the current fix interest rate, than we are losing some savings as we have missed the opportunity to fix the interest rate.

We are going to investigate the on-line home loans as well, probably speak to some of the home loan brokers such as Aussie Home Loans or Mortgage Choice.