HOME LOANS – PREDICTING THE FUTURE OF INTEREST RATES

“If all economists were laid end to end they wouldn’t reach a conclusion”. These unkind words from Irish playwright George Bernard Shaw succinctly reflect a widely held view about the practitioners of that most dismal of sciences known as economics.

And yet, it is in times of financial uncertainty such as we’re experiencing at present, that we look to economists for guidance about the direction of home loan interest rates. Borrowers do so in the hope of learning the answer to that inevitable question about whether they should use a variable interest rate home loan or lock in a fixed rate loan or a combination of both.

Understandably, we become quite frustrated when economists can’t seem to agree on the answer to this most basic of questions. After all, even well-meaning friends (unwisely) offer definite views on this and many other complex issues that exercise the minds of professional economists!

So why can’t economists be similarly definite? 

The answer is that the world about which they advise is driven by a multitude of variables, many of which are not readily measurable. They include sentiment, self-interest, political ideologies, world events, the weather and competing financial decisions by citizens, businesses and policymakers.

Therefore, successfully predicting the future is challenging at the best of times, but with the added complexities and uncertainties of a large and competitive system like the Australian economy, it becomes pretty much impossible. As a result, economists understandably tend to hedge their bets and talk in probabilities, knowing that they are likely to be wrong in whole or in part at least 50% of the time. 

So in thinking through whether you should have a variable interest rate home loan or a fixed rate loan or both, we suggest that you should think like an economist….in probabilities and by hedging your bets.

Consider these wise words from Senior Finance Journalist, Alasdair Duncan, writing recently for financial website, Canstar:

“There is no ‘better’ choice between fixed and variable home loans, as both have pros and cons, so what is preferable will come down to your personal choice. If you are concerned about rising interest rates, as many Aussie home loan borrowers may well be in the current climate, then you might decide that the certainty of a longer fixed term is appealing, because it will protect you against rising interest rates.

Conversely, if you are not concerned about rate rises and prefer the additional features that come with variable rate home loans, one of these may be the preferable choice for you. You may even find that a split rate home loan, combining both, is a suitable choice for you. A split rate home loan is essentially two separate home loans, one on a fixed rate, the other variable.

Some lenders may let borrowers decide what percentage of the loan to keep fixed, and for how long, and what percentage to make variable. With a split loan, you might have the convenience of features like offset accounts and redraw facilities, allowing you to pay your mortgage off more quickly, while you might also have the certainty of knowing that part of your home loan is fixed, and won’t be vulnerable to rate rises”.  

Whatever you decide, here are a few key tips to consider:

• Do a budget and check that you can afford the loan repayments
• Do a stress test to ensure that you can still afford the repayments if rates were to rise
• Research the market for the lowest interest rates and fees. Doing so could save you many thousands of dollars over the period of the loan/s
• Consider making extra loan repayments. This will save you a great deal in interest and will pay off the loan/s a whole lot faster
• Check any restrictions and fees that may be incurred by paying off your loan/s faster (especially on a fixed interest arrangement)
• Watch out for loan scams. If interest rate/s look too good to be true, they probably are   

If you’d like to know more, we have a wealth of educational information on the Centre’s website that we’ve designed to help you in achieving your home ownership goal. Start by reading our top 10 tips to property ownership.

We also recommend becoming familiar with the Financial Essentials and Tools sections of our website which contain calculators and guidance on goal setting and how to reach them.

Last but not least, we recommend reading our recent newsletter story on achieving financial independence while serving in the ADF.