Fixed vs. Variable Interest Rate
One of the major choices to be made when choosing a home loan or a loan on a residential investment property is whether to take a variable interest rate or a fixed interest rate.
A fixed interest rate will not change during the fixed period. During the fixed period the borrower knows their repayments will remain unchanged.
A fixed rate loan is also advantageous if variable interest rates rise. When variable interest rates raise a borrower with a fixed interest rate is relatively better off because their rate will remain unchanged.
Conversely if interest rates fall a borrower with a fixed interest rate is relatively worse off because they do not benefit from the fall in variable rates.
A variable home loan interest rate should move up and down with market interest rates. The main determinant of variable home loan interest rates is the cash rate set by the Reserve Bank of Australia. When the Reserve Bank alters the official cash rate, most variable home loan interest rates change by a similar, if not identical, amount.
Home loans with a variable interest rate usually have the highest repayment flexibility. The norm is that the borrower can pay out their loan without penalty.
The Fixed or Variable Interest Rate Simulator allows the borrower to analyze the choice of a fixed or variable rate by modeling changes in the variable interest rate and comparing the amount repaid during the period and the outstanding loan balance at the end of the period.
Mortgage Rates Fall To Record Lows in Latest Week
Mortgage interest rates took a dive last week, now back down to the previous all-time low, as uncertainty in the housing market and stock market continued to make investors nervous.
The average rate on a 30-year fixed rate mortgage (FRM) fell to 3.94 percent, excluding points, according to Freddie Mac, matching the record low point from October of this year. The 15-year FRM number also made record territory, falling to 3.21 percent, the lowest yet recorded by Freddie.
Frank Nothaft, Freddie Mac vice president and chief economist, attributed the drop to trouble in the real estate markets.
“Mortgage rates were at or near all-time record lows this week amid a rough environment for housing,” he said in a statement. “In its December 13th monetary policy announcement, the Federal Reserve reiterated the housing market remains depressed. Over the first nine months of 2011, households lost almost $400 billion in property values which contributed to a $1.4 trillion reduction in overall net worth. In addition, serious delinquency rates (90 or more days delinquent, plus foreclosures) on mortgages increased slightly between June 30 and September 30, breaking a six-quarter consecutive decline, according to the Mortgage Bankers Association.”
Gumbinger ties this week’s rate more to Europe’s debt issues. As the financial troubles continue to play out, “There’s been a flight to quality out of Eurobonds and into Treasuries,” he said. And that flight has brought Treasury bond yields down, in turn pulling down long-term interest rates.
It seems there may yet be room for rates to fall. Many economists believe the 10-year Treasury yields could further decline into the New Year. That will keep rates affordable, but with the number of people able to take advantage of them remaining limited, there still may not be much movement in the housing market.