A home loan is a financial decision for up to two decades, so it is advisable to consider your choice. Should a loan be fixed or variable? The Bank Monitor calculated the repayments and considered the risks.
One of the most important issues when borrowing is how one can save money, that is, how to keep the amount paid to the bank as low as possible. For example, for a $ 10 million loan, if you end up paying 7% instead of 5% interest, then over 20 years, you will be paid almost $ 3 million more in interest.
The eternal question of what to do with the client is:
- the cheapest home loan with installments that vary up to every 3 to 6 months and are difficult to calculate
- or choose a loan with a fixed rate of at least 3-5 years and security, which will make the initial repayment higher.
Borrower is best suited for a fixed-rate loan. Why?
According to Bankmonitor, a borrower is best suited for a fixed-rate loan because he can now buy low-priced low-interest rates. Loans that change every 6 months can be taken at a APR of 3%, whereas a 5-year fixed rate loan is available at 4.5%. Cautionary cautions are warning that interest rates will start to rise over time, and then, due to the increasing installments, the cube will immediately turn, and now cheaper credit proves to be the worse choice.
Therefore, there is a very high risk for fast (within one year) variable rate loans. The central bank has pushed yields down to virtually zero, but this situation may fundamentally change in the coming years.
As a warning, while expected inflation is 3% next year, the base rate is 0.9%, while the BUBOR used to rate floating rate loans is only 0.15%. No one can think that this will be the case for all, and this is a key issue because, as a rule of thumb, a 1% interest rate increase will increase the repayment rate by 8-9%.
Bankmonitor looked at what the government securities market is now expecting for future yields
And on that basis, the situation is not too rosy. For example, in the next 3-5 years, the short-term yield may rise to 1-2% without further ado, which of course will be enforced by the bank on a loan with a rapidly changing interest rate. Probably no one would be happy to see the installment increase by 10-20% from the initial value in a few years.
Incidentally, it is worth noting that if the bank moves the interest rate by between 1-2%, then we are just out of losing the advantage of a floating rate home loan, such as a 5 year fixed rate loan. In fact, according to current calculations, the 3-month yield may return to the expected level of inflation, ie to 3%. If this is the case, BUBOR may rise to a similar level. Along with that, the installer will be at a significantly different level.
Interest rate on a five-year mortgage can be higher in five years
One could rightly say that the interest rate on a five-year mortgage can be higher in five years. That is certainly true, but in this case the risk of a real increase in interest rates is not so great. The pricing anomaly for a five-year bond yield may be much smaller than for a year, so the borrower is also less exposed to rising yields. All in all, there is another reason why a safe fixed rate loan is a good choice over a variable.