Phil Lowe won’t raise interest rates. Trust him, he’s a doctor
When banks start taking out fixed rate home loans, the question should be asked: will someone be better off with a variable rate or fixed rate home loan?
This question is never easy to give a definitive answer, as personal situations can vary from borrower to borrower. And it depends on what rate you received, when you received it, and for how long.
If you are looking to get out of the loan and whether or not you want to repay it early, there are other questions that could determine whether you are better off with a variable versus a fixed rate home loan.
And there is one more fluctuating factor that could determine what is best: Can you tell the governor of the reserve bank, Dr. Phil Lowe, trust me when he says the cash rate will be 0.1% by 2024?
Now Dr. Lowe never said exactly those words, but he did imply it, and some in the media have interpreted his words that way. On the other hand, I used the George Costanza line from His field that says “it’s not a lie if you believe it!”
If the good doctor is telling us the truth, someone with a $ 600,000 loan (roughly the average Australian mortgage size) would only make around $ 1,320 in cash if they were on the best fixed rate over the best adjustable rate for just three years holds!
But let me emphasize that this depends on whether we are Dr. Can Trust Phil!
If after a year the Australian economy is booming and inflation is rising here and in the US, the pressure to start raising interest rates would be strong on the RBA. And it could show with a falling Australian dollar.
This is all speculation on the negative for interest rates, but it is actually speculating on a very positive economic outlook for the Oz economy. Remember, the treasurer said in the most recent budget that the economy would grow at a gangbuster rate of 4.25% in 2021/22. Our average growth rate between 1992 and 2017 was 3.3%, so 4.25% is big.
Let me share my thoughts with you to show how the profit of $ 1,320 on a fixed rate loan shows up.
I found the best 3 year fixed and floating home loan interest rates on the Rate City comparison website.
With UBank’s fixed rate home loan, the monthly repayments are $ 1,250 while the variable repayments to Athena are $ 1,270. That’s a $ 20 difference and there are 36 months through May 2024, so 20 times $ 36 is $ 720.
That’s not much to give up if you like the adjustable rate home loan options so you can repay your loan quickly with no penalty, redraw feature, and other benefits that many fixed rate loans don’t.
But what if Dr. Phil needs to give us some 0.25% rate hikes through 2024? Well, that changes the cash comparison significantly and makes a fixed rate loan better for your cash flow.
If the floating rate increases from 1.99% to 2.49%, the repayments increase from $ 1,270 per month to $ 1,344. Let’s say there are 18 months with a higher interest rate, then you could be out of your pocket at $ 94 per month, which is $ 1,692, for 18 months.
By the way, based on history, when the RBA is concerned about inflation and an overheated economy, rate hikes often go threesome. And I should say that a lot of people reading this could have mortgages over $ 600,000.
If we double the borrowing to $ 1.2 million, the cost to Dr. Phil potentially breaking his promise to $ 3,384!
If this has got you thinking about your bonds, let me warn you a few more times:
- First, check your interest rate on these comparison websites.
- Look at the headline rates, which can be so low, but the comparison rates can be very high. Look at the actual monthly repayments and all of the other fees that actually make the loan you are comparing more expensive than you think.
- Comparative rates are more valuable when comparing two variable home loan interest rates. With Fixed they are not that easy to interpret. For these loans, see your total payments – monthly and all other fees.
- One of the best headlines or advertised adjustable rate home loans is a very low 1.99%, but the comparison rate is, wait, 2.47%! The Athena loan I used in my example has a floating rate of 1.99% and a comparative rate of 1.99%. Wait, there are no additional sneaky fees that other lenders charge.
- If this is too much for you, try some mortgage brokers so that you can compare what they can find for you in terms of the best interest rates.
What are the big messages?
Get a smart loan, use comparison websites or a mortgage broker, and if you’ve over borrowed a variable home loan, you’d better hope that Dr. Phil can keep his interest promise.