A new study by financial comparison website RateCity found that monthly repayments, and therefore spending capacity of households with a variable rate home loan, have fluctuated wildly over the past four years, and warns of more fluctuations ahead.
The study compared monthly mortgage repayments since May 2008, using the benchmark basic variable rate – the average of the four major banks including ANZ, Commonwealth Bank, NAB and Westpac.
RateCity found that monthly repayments for a $400,000 home loan have fluctuated by as much as $957 during the past four years, between the lowest point in May 2009 when the benchmark basic variable rate was 5.15 percent, and the highest point when the benchmark rate hit 8.90 percent in August 2008 (see graph below).
From the low point in May 2009, a household with a $400,000 loan is now paying $400 more per month.
Michelle Hutchison, Spokesperson at RateCity, said the study shows how interest rate movements can significantly impact household spending power, and how much the Australian retail economy can be affected by variable rate changes (because approximately 2.5 million households have variable rate mortgages).
“A borrower who took out a $400,000 home loan four years ago has experienced monthly repayments as high as $3,190, to as low as $2,184. Monthly incomes certainly don’t fluctuate like this for most PAYE taxpayers – so huge swings in repayments place great pressure on their ability to not only meet their repayments but also pay for other expenses.
“It shows how vulnerable borrowers are with a variable rate home loan and the need to be prepared for interest rate fluctuations. And despite welcome relief over the last six months, with repayments approximately $100 less per month than in October 2011, remember that households with a $400,000 mortgage are still paying $400 more than in May 2009. This is one reason why consumer confidence in Australia is still very poor.”
Ms Hutchison said it’s an ideal time to prepare for variable interest rate hikes in 2013 or beyond.
“About half of the lenders in RateCity’s database have dropped their variable interest rates after the Reserve Bank lowered the cash rate by 50 basis points earlier this month. It’s expected that variable rates could fall further this year.
“This makes it an ideal time to prepare for rate increases in the future by keeping your repayments the same or making extra repayments. Borrowers should keep a buffer of at least 2 percent to keep above water if rates rise, which is about $500 for a $400,000 mortgage from a rate of 6 percent to 8 percent,” she said.
Monthly repayments for a $400,000 home loan at different points over past 4 years
|Date||Benchmark basic variable rate||Monthly repayment|
- RateCity used the average of the major 4 banks’ basic variable rates (as opposed to standard variable rates) as this is closer to what most variable rate customers of the major banks would be paying.
- The major 4 banks’ rates were used as a benchmark as they hold the majority of the home loan market.
- We used a case study of a $400,000 loan over 30 years. We can apply the same calculation to any home loan balance upon request – for example, the average home loan balance for different states of Australia.
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