WITH interest rates heading north over the next 12 months, what are the options for borrowers and investors?
Borrowers with variable rate loans can expect to pay an extra 1.50-1.75 per cent by next year, assuming banks fully pass on the forecast rise in rates.
This would take the standard housing loan rate from about 6.0 per cent presently to a peak of 7.50-7.75 per cent.
Homebuyers who switch to a fixed rate loan would incur an immediate increase in borrowing costs.
Three-year fixed rate loans currently average about 6.8 per cent while five-year fixed rate loans average about 7.3 per cent.
Borrowers need to assess whether the average cost of a variable rate loan would be higher, or lower, over three or five years.
They also have to assess whether they are able to carry the risk of staying with a variable rate loan.
While the forecast increase in borrowing costs is modest by historical standards, there is no guarantee that rates will not rise sharply.
A popular option for many home-buyers is a split loan, with half at a fixed rate and half at a variable rate.
This provides some protection against higher rates, while preserving the flexibility that is a feature of variable rate loans.
Businesses also can switch to fixed rate loans, or they can use treasury products like ‘caps’, which are like an insurance policy against higher rates.
Investors can also choose between variable rate products such as cash-management accounts, or fixed rate products such as term deposits.
However, many investors are opting for managed investments with the potential for consistently higher returns.
