Mortgages These five options show how you can save $35,000 over two years by making the right choice. Duncan Hughes reports.
Carla Allen is one of hundreds of thousands of borrowers facing the challenge of what mortgage to choose as her cheap two-year fixed rate on a Sydney northern beaches apartment comes to an end.
Allen, a senior human resources adviser with an engineering company, knows the wrong choice could add an extra 40 per cent to the cost of remortgaging her home.
“I’m a little surprised how quickly rates have turned around,” says Allen, who has switched to a variable rate loan of 2.44 per cent with Athena Home Loans, a small lender backed by AustralianSuper and Macquarie Bank. Her previous fixed rate with ING of 2.09 per cent has more than doubled to 4.69 per cent.
Record numbers of borrowers are approaching the end of their fixed terms and are set to switch or roll into their lender’s default rate as rising cash rates and bond yields rapidly push up the costs of borrowing.
Investment bank UBS estimates borrowers with $350 billion of fixed-rate loans could receive a 20-40 per cent mortgage shock when they roll into higher rates over the next few years.
Leading mortgage broker Australian Finance Group estimates a record $37 billion of fixed-rate loans on its books will mature over the next three years (that’s three times higher than average), according to chief executive David Bailey.
But a Mortgage Choice survey finds more than half of borrowers are not aware of the rate they are paying or whether they intend to re-fix their rate or choose a variable rate loan.
The following five scenarios provided by RateCity, which monitors rates and fees, covers some options faced by a fixed-rate borrower ending their loan this week.
The scenarios are based on an owner-occupier paying principal and interest on a 25-year, $1 million loan fixed for two years in 2020 at the average big four bank rate of 2.27 per cent. The assumption is that the cash rate rises from 0.35 basis points to 2.25 per cent by May 2023, which is based on projections by Westpac.
In scenario one, the borrower takes no action and lets the loan roll on to the revert rate, which is 3.66 per cent and forecast to rise to 5.56 per cent over the next two years. This would result in repayments of $95,000 in interest and fees over the two years.
Under scenario two, the borrower would negotiate to refix for two years with one of the big four banks. The rate of 4.17 per cent is based on the average of the big four’s lowest two-year fixed rates of between 2.42 per cent and 4.32 per cent. Total repayments after two years would be around $76,000.
Scenario three involves the borrower renegotiating to the big four banks’ lowest variable rate, which is on average 2.42 per cent but forecast to rise to 4.32 per cent in two years. It would result in repayments of around $71,000 over the two years.
In scenario four, the borrower refinances to one of the cheapest variable rates from any lender, currently under 2 per cent but rising to almost 4 per cent over two years. Repayments would be about $64,000 over that time.
Under scenario five, the borrower would refix for two years on one of the cheapest rates on offer, currently 3.24 per cent. Repayments over the two years would total around $60,000.
“Variable rates look more attractive than fixed rates right now. However, borrowers should remember these rates are not going to stay low for long,” warns RateCity research director Sally Tindall. “The cash rate could rise to over 2 per cent by May next year. People need to factor this in.” Chris Foster-Ramsay, principal of mortgage broker Foster Ramsay Finance, says borrowers should be ready to renegotiate a cheaper rate.
He says low-risk borrowers with steady income, a good record of repayments and more than 20 per cent equity in their property should be about to knock off one or two percentage points.
Record numbers of borrowers have flooded into fixed-rate loans over the last two years as rates for top one-, three- and five-year fixed loans fell below 2 per cent for a $1 million borrower with a 20 per cent deposit seeking a 30-year loan.
In the past year, the average two-year fixed rate for a principal and interest owner-occupier loan has more than doubled to 4.14 per cent, according to Canstar, which monitors rates. The most expensive two-year rate is more than 6 per cent.
