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Rates are on the rise
VARIABLE interest rates could rise within weeks but consumer advocates warn home buyers should not let that panic them into fixing their mortgage.
The Reserve Bank is expected to raise official rates by 0.25 per cent as early as March 2 in a bid to head off rising inflation, adding an average of $80 to monthly repayments on a variable Sydney mortgage.
Another 0.25 per cent move is tipped to follow, forcing repayments even higher still.
InfoChoice analyst Denis Orrock said fixed rates, currently around 0.25 per cent below the standard variable 6.97 per cent, could be a good alternative for some.
But he said they should be carefully scrutinised.
"It makes sense if you are stressed and under the hammer," he said. "There are still some good fixed rates available but people should be aware of the costs."
A fixed interest loan may not offer all of the features of a variable, such as the ability to vary repayments.
Borrowers must also time their move carefully as lenders can change fixed rate offerings in the time it takes to settle.
"If you apply for a fixed rate today, four or five weeks later you might not get the same thing," Mr Orrick said.
Meanwhile, competition between lenders has maintained pressure on variable rates, even as the Reserve Bank prepares for an official increase.
Non-bank lender RESI broke new ground last week, launching its "Great Rate" with variable interest of 6.88 per cent, squeezing Wizard's "Rate Breaker" out of its coveted spot as the market's cheapest by 0.01 per cent.
Mr Orrick said RESI was trying to rob its non-bank competitors of market share by offering a dirt cheap, no frills home loan, without the flexibility and extra features of more expensive products.
"It's obviously an aggressive push to take on Wizard," Mr Orrick said. "The loan itself is a very basic home loan - it's the kind of thing your parents might have had 20 or 30 years ago - and it's priced accordingly."
Australian Consumers' Association finance policy officer Catherine Wolthuizen said a variable loan might work out cheaper over the long run, even in a climate of rising official interest rates.
"Consumers should take into account any costs or other fees when they're considering whether a fixed rate will actually put them ahead," she said.
"Ultimately, rates are unlikely to rise very high."
The Reserve Bank signalled its inclination towards higher rates in its most recent public statement. But it has also acknowledged higher personal debt levels now restrict its capacity to make large increases without seriously damaging economic well being. That makes it probable rises will be smaller in size and fewer in number than previous rate-tightening periods.
Ms Wolthuizen said borrowers worried they might not meet higher repayments needed to consider the broader issues.
" eople on the knife edge probably need to make a more fundamental reassessment of their situation," she said. "Rather than shuffling deck chairs on the Titanic, they need to figure rate rises into the broader context."
Options could include rationalising other personal debts by rolling them over into a cheaper loan or keeping to a tighter budget.
For a small minority facing the worst case scenario of selling up, it was better to act sooner rather than later, she said. |
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