Sydney, Australia, August 10, 2009 --(PR.com
)-- Despite expectations of Australian interest rate rises in the near future, Australia’s leading financial comparison website RateCity (RateCity.com.au) is warning home owners not to panic.
The warning comes after the Reserve Bank of Australia’s (RBA) expected decision today to leave the cash rate on hold for the second consecutive time, and the recent announcement by the Rudd Government that interest rates may rise by almost 1 percent over the next 12 months, as well as the market expectation for a 200 basis point rise in the coming five years.
New research released by RateCity proves that sticking to a variable rate for the next five years can save mortgagees thousands of dollars.
“Taking a fixed rate at 7.25 percent today is like buying two car insurance policies for the same car,” said Michelle Hutchison, Consumer Advocate at RateCity.
“Fixed rate options have factored in market expectations so if you’re buying extra protection that the market is not expecting, why would you fix?”
The market is expecting interest rates to rise by up to 2 percent gradually over the next five years. If this occurs, the average standard variable interest rate would rise from the current 5.25 percent to 7.25 percent.
RateCity research found, by factoring in the expected variable rate rises for a home loan of $275,000, the total interest paid over the five-year period would be $85,185. Compared to locking in a fixed rate now for the next five years, which is currently averaging 7.25 percent, total interest paid during the five years would be $95,753.
By choosing to stay with the variable rate rather than a fixed, mortgagees could potentially save $10,568 of interest with about the same amount of debt paid off the loan.
“Choosing whether your home loan should be fixed or variable is all about timing,” said Mrs Hutchison.
“Compare your current variable rate to the current average fixed rate of 7.25 percent. If your variable rate is close to the current fixed rate than it’s an easy decision to switch, however if it is further than a 1 percent difference, the decision is much more difficult.”
The research also found that paying an extra $165 per month off a home loan of $275,000 for the next five years can save about $1,400 in interest as well as reducing the debt by $11,279.
Double the extra repayments to 20 percent or $330 per month over five years and savings would equate to $2,782 in interest and the debt would be reduced by $22,557.
RateCity Market Expectation total change new rate by date
Year 1 and Year 2 1.00% 6.25% Jul-2011
Year 2 and Year 3 0.50% 6.75% Jul-2012
Year 3 and Year 4 0.25% 7.00% Jul-2013
Year 4 and Year 5 0.25% 7.25% Jul-2014
Source: RateCity Research
Launched in December 2006, RateCity.com.au is the website where Australians can easily find, compare and apply for over 13,000 financial products from over 250 institutions. It spells the end of travelling from website to website and the beginning of discovering the very best value product for you. Our job is to take the hassle out of finding the right financial product - saving our users both money and time.
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