In Fixed Loan Rate scheme, the interest rate that is applied to your principal loan is “fixed” for the entire agreed upon period of your loan. Opposite to the Variable Loan Rate, where interest rate applied can change over time, you will be required to consider multiple factors from time-to-time. In fact, if we refer to the post of an independent financial portal – Financial Web, factors such as economic status, inflation, actions and mandates of the government, international forces, US financial system and exchange rates of US dollar are the things you need to watch out for since these affects directly the amount you will be paying regularly.
To understand this better, let’s take a look at the 2012 report of Australian Bankers Association (ABA), where they presented the timeline of interest rates in their report. This table shows the significant changes in Standard Variable Rates (SVR), specifically for home loan, on a set of month’s basis:
As you can see there are only a few months at certain periods where interest rates for home loan is really low. March 1990 to September 1993 – there was a drop of -825bps but it only sustained for 4 months. After which it went back to 10.50%. June 1997 to August 1997, for 15 years interest rate is at 10.50% which went down to 6.70% but in the span of 14 months it went back to 8.05%. The cycle continues to go up and down up until November 2010 where there was again an increase of 205bps with interest rates now at 7.80%.
Now if we are going to take a look at the current interest rates of banks for home loans you can secure a 5 year fixed loan from 4.89% – 5%. Putting this data together with the one presented in the report of ABA, we are at times now when interest rates are at its lowest point. One thing to consider is that properties have cycles and trends. For further understanding of this you can refer to the articles of Australian Property Agency – Property Cycles and Property Cycles and Trends . If you view these pages combining with the report of ABA, there is a big probability that the next movement of home interest rates is going up.
This is where the Fixed Loan Rate is at its best.
Technically this gives you the advantage to “lock” or “fix” the interest rate you will be paying for the next 5 years while the rate is still at its lowest point. Furthermore, home loan interest rates are now at 4.5% – 5% which has never happened so far for the past 23 years – based on the report of ABA.
Therefore, it is highly recommended that if you are planning to invest in a home, now is the best time to do it.Locking it in 5 years’ time, this will give you the peace of mind that no matter how high interest rates may increase for the next few months, you will be “immune” to such events and getting your home at the lowest possible interest rate. This also assures you that you are really getting every cent of your hard earned money.
Reference:
http://info.finweb.com/banking-credit/factors-influencing-interest-rates.html#axzz3ILimUeWN
http://smallbusiness.chron.com/variable-vs-fixed-interest-rate-5024.html
http://www.ratecity.com.au/home-loans/fixed-rate
http://www.bankers.asn.au/Banks-in-Australia/Facts—Figures/Standard-Variable-Home-Loan-Interest-Rates-1990-2010