Mortgage rates are set to creep up no matter who wins the federal election.
One of the hottest issues around at the moment is whether interest rates will rise, and if so, by how much. Before the federal election was called, the Reserve Bank indicated it expected an increase, and many economists now predict that, regardless of who wins the election, rates will still rise before the end of the year.
Even without the heightened emotions generated by election spin and hype, interest rate rises hit that raw hip-pocket nerve for many Australians. No one wants to be squeezed by increasing mortgage payments and many borrowers are understandably panicked by threats of double-digit rates.
The good news is, rates are extremely unlikely to soar that high again, no matter who manages the economy, though the reason is perhaps less comforting for some borrowers. Basically, the Reserve Bank gets more "bang for its buck" these days, because so many Australian households are mortgaged to the hilt. If the Reserve Bank wants to send a signal to the economy, a whisper (a small rate rise) is equivalent to a roar.
This fact is an important consideration for those borrowers wondering whether to refinance and, in particular, whether to move from a variable-rate loan to a fixed rate. Before making such a decision, it's important to keep the following in mind.
First, fixed rates are generally higher than the variable rate, so you'll immediately be signing up for a more expensive loan.
Whether this works in your favour depends on what you're currently paying and whether rates are likely to rise much higher over the longer term. While they may go up again, it is extremely unlikely Australia will see the double-digit interest levels which burnt borrowers in the past. This is because the Reserve doesn't have to go to those extremes to have an impact.
While fixed-rate loans previously have protected some borrowers from multiple rate rises, I've yet to hear an economist predict those rises will happen again. So the past advantages of fixing your home-loan rate may not be so relevant to future rate movements, especially as you can generally fix for a period of between only one and five years. You'll also limit your future flexibility, as fixed-rate home loans often come with hefty break, or exit fees which penalise you for switching out before the expiry of that period.
Lenders calculate break fees in different ways, but generally you'll be up for the difference in the rates you agreed to pay and the current lower rate a cost of thousands of dollars. Some lenders charge a flat "exit" or "deferred establishment" fee.
An alternative to fully fixing your home loan is to switch to a split, or combination loan. These are loans for which part is treated as a fixed-rate loan (usually for up to five years), and part as a variable rate. If you feel vulnerable to rate rises and find a fixed-rate loan at or just above the rate you're paying, they can combine security and flexibility.
Another way to reduce the cost of your mortgage is to shop around for a cheaper variable-rate loan. Some basic variable-rate products now have more than the bare minimum features. They may not offer an offset account or redraw facility, but if you don't have much spare cash at the end of each payment period, those features may not be appropriate for you anyway.
As always, when considering changing your home loan, look beyond the difference in the interest rate and make sure you factor in the cost of:
Mortgage insurance if you have less than 20 per cent equity in your home.
Government charges (such as stamp duty in some states and the mortgage registration fee).
Legal costs.
Establishment fees.
Honeymoon rates and the reversionary rate.
If you find a more competitive deal, go back to your current lender and see whether they'll match the rate and features giving you the benefits of the better deal without having to switch.
For more information on bank accounts and even how to flick your bank see the Choice website, www.choice.com.au.
Catherine Wolthuizen is senior finance policy officer at the Australian Consumers Association.
