There is always a great deal of debate in the media around whether borrowers (more specifically, first home buyers) should choose to leave their interest rate variable, or go fixed (or a combination of both). With the RBA Cash Rate staying stable for over 12 months now, the debate has gained another gear with many economists & banks putting forward their predictions for the next movement in the interest rate.
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In this special feature, we take a look at why fixed rates are so popular with first home buyers and what trends our first home buyer specialist mortgage broker service – FHBA Mortgages, is noticing in the first home buyer loan market. Fixed rate home loans offer you a peace of mind against increasing repayments, which allows you to budget with confidence. Unlike a variable rate home loan where your repayments can move up and down in accordance with the cash rate (or at the lender’s discretion!), fixed-rate repayments remain the same over the fixed term period.
Click here to see FHBA Co-Founder Taj Singh’s comments in relation to fixed rates in Domain’s article, along with some words from an FHBA Client – Ashley Floate (who successfully purchased his first home in 2017)
What are the predictions for interest rates in 2018?
The big 4 banks of Australia, who own the majority of Australia’s mortgage market are constantly reviewing their interest rate outlook. Their internal predictions play a big part in how they price their variable and fixed rates. See below for each of the bank’s outlook for interest rates for the 2018 calendar year:
|Two RBA rate increases
|Two RBA rate increases
|One RBA rate increase
|No change in RBA rate
As we can conclude from the above, 3/4 of the banks believe interest rates will go up rather than come down. This is one contributing factor that has led to a greater number of first home buyers choosing to fix their interest rates.
Why are first home buyers choosing to fix?
At FHBA Mortgages, our first home buyer clients have mentioned many reasons why they are looking to choose a fixed rate home loan
1. Competition for owner-occupier lending
After APRA’s clampdown on investment & interest-only lending, we are now seeing more banks competing for owner occupier loans which has resulted in lower fixed rates. Some fixed rates that are being offered have not been seen for a long time.
e.g. Advertised 3 year fixed-rate of 3.69% and 5 year fixed-rate of 3.99%
2. Certainty of repayments
As first home buyers are borrowing a large chunk of funds for the very first time, many would prefer to know exactly how they need to make in repayments for the early stages of their mortgage life. For this reason, the 3 year fixed rate is most commonly selected by first home buyers.
3. Availability of the offset feature on fixed-rate loans
An offset account is essentially a savings/transaction account with the lender. Instead of receiving interest on the savings account, the interest payment due on the loan is calculated only on the net balance of the loan less the savings account. Until recently, most lenders have only allowed offset accounts on variable rate loans, however, more lenders are now introducing offset accounts on fixed-rate loans too. For first home buyers who are looking for certainty and the ability to park their additional money into an offsetting account, this is a perfect solution!
4. Uncertain economic outlook
A lot has been said about the housing market and the direction of the Australian (& global) economy. While a lot of this information is conflicting from different sources, it does have an impact on what first home buyers decide to do. The strong gain in property prices and ballooning household debt over the last few years has forced some first home buyers to wonder whether the RBA may look at reining the prices & debt by increasing the Cash Rate, which would more than likely result in increases in the variable rates the banks are offering.
5. Stable RBA Cash Rate
A number of our clients believe the stable RBA Cash Rate means variable rates may not come down much more than they are now. Therefore, to get ahead of the curve and protect themselves from possible future rate increases, many first home buyers are choosing to fix their interest rates, whether that be when they first get their home loan or a few months following the purchase their first home.
6. Higher variable rates for low deposit loans
Due to the risk factor for lenders, many offer higher than standard variable rates for first home buyers looking to borrow more than 90% of the property value. Surprisingly, some lenders still offer the same fixed rates as they would for those borrowing less than 90% of the property value, making the fixed rate an easy selection for first home buyers.
FHBA Mortgages – Trends
Our FHBA Brokers/Coaches help first home buyers achieve their Great Australian Dream of home ownership on a daily basis. Our team has identified some key trends & stats on first home buyers who bought their first home in the 2017 calendar year.
Some of the more obvious trends we have noticed include:
- 83% of first home buyers chose to have some sort fixed rate arrangement as part of their first home loan
- 63% of first home buyers chose to have a 100% fixed rate loan
- 95% of first home buyers borrowing more than 90% of the property value (there were plenty of them!) chose to have a fixed rate loan due to the gap between the variable & fixed rates offered by their preferred lender
- 30% of first home buyers chose to go for a fixed rate home loan product that also came with an offset rate, albeit even if it had a slightly higher interest rate product than other products
- For the proportion of first home buyers that chose a fixed rate; 65% chose a 3 year fixed rate, 25% chose a 5 year fixed rate and the remainder chose a 2 year or 1 year fixed rate.
As we can see from the above trends/data, it can be assumed that most first home buyers are keen on starting their mortgage lives with some sort of security by locking in their interest rates for a minimum of 3 years in the stable RBA Cash Rate environment.
Are you looking for a fixed rate home loan?
If you are looking for a fixed rate home loan or would like some more information on how fixed rate home loans work, then talk to the first home buyer experts i.e. your FHBA Broker/Coach.