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Wednesday, 22 April 2009

Fixed the interest rate on part of our home loan

Most (90% or so) of home loans in Australia are variable rate, and fixed rate loans are generally only available for terms up to 5 or 7 years. My parents had a 30-year fixed rate home loan when they bought a house back in the early 1960s, but Australian banks moved to the 'standard' variable rate loan during the high inflation (nearly 20%) period of the 1980s.

We fixed the interest rate on our investment property loan for five years when rates started to climb about four years ago. And we will probably end up paying about the same average interest over the five year period as if we had stuck with a variable rate (due to the recent record low interest rates).

We had been hoping to change part of our home loan from variable rate to a fixed rate this year, and I had expected the fixed rates on offer to keep dropping during 2009 as the RBA keeps cutting the official interest rate. However, the last rate cut by the RBA didn't result in much change in the variable rates of the 'big four' Australian banks, and yesterday the Commonwealth and Westpac banks announced a RISE in their fixed rate loan interest rates. So today we took advantage of my day off to do the paperwork for moving $270,000 of our home loan to a fixed rate of 5.34% for three years. There is a $500 fee involved, so over three years the effective fixed rate will be around 5.5%. This is higher than the current standard variable rate (with a 0.7% negotiated discount), but may save us some money over the next three years if the economy starts to recover towards the end of 2010 and interest rates start to trend up again.

We still have the other $230,000 of our home loan at the negotiated variable rate, so we're hedging our bets.

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