Home Loans: Caliber, Embrace, Evergreen, and Box

The weekly and monthly economic indicators produced by the Bureau of Statistics and pored over by economic commentators and politicians mean little to the average person.

While they may take a passing interest, they already know the news from first-hand experience. Ask the person who does the grocery shopping how inflation is running, ask the business person about consumer confidence, and ask the home buyer about interest rates.

They all know where the economic pain is because the hip pocket is the most sensitive economic indicator of all – and this especially true when applied to home loans.

It is only a couple of years ago that interest rates had rocketed to 17 percent, forcing many people to lose the family home. Those high rates were largely unforeseen. Today’s variable rates, of just under 9 percent, were also thought to be unlikely.

The big question occupying the minds of economic commentators is whether home interest rates have bottomed. Will the next movement be upward? Or will they just sit tight indefinitely?

But the question for consumers is whether it is a good time to lock into a fixed rate for between two and five years, or to stay with the variable rate.

Home Loans Caliber, Embrace, Evergreen, and BoxA fixed rate home loan means that for the chosen period, the rate will neither move up nor down, and at the end of the period it becomes variable.

For a two-year term the current fixed rate can be 0.5 percent below the variable rate. The longer the term of the fixed rate (say three, four or five years) the more expensive it becomes with the five-year rate creeping up towards 10 percent.

The two-year fixed rate, which is below the variable rate, may seem like a good buy at the moment, but that’s what they said about the fixed rate of 15 percent which was popular when the variable rate kept shooting up.

The home buyers who locked into 15 percent are either still paying that rate, or had to pay a substantial penalty to switch to another type of loan.

The advantage of the fixed rate is that it provides stability and certainty, with borrowers knowing exactly what their repayments will be, and for how long.

A disadvantage, apart from the payout penalty, is that borrowers are not allowed to pay more than the prescribed monthly amount. This means they are not allowed to make higher payments in order to reduce the debt. Another disadvantage is that like the people on 15 percent, they could lose out if interest rates drop further.

In addition to variable and fixed term home loans there are capped rates applying to new loans and usually available for six or 12 months only. For this period the interest rate may be under 7 percent, and will not exceed the specified rate but may move down if variable rates go below the cap. At the end of the capped period the loan reverts to the variable rate.

Borrowers should be careful not to be tempted by today’s relatively low rates and borrow more than they can afford to repay. They will be hit hard if interest rates move upwards. People are basically gambling on interest rates, and gambling with their capacity to meet the repayments.

Fixed rate home loans can give some certainty but whether they should be taken up depends on individual circumstances. The danger is that people look at their financial capacity today, when they should be thinking five years or more ahead.

Home buyers should take into account various what ifs, such as starting a family or losing an income. Whatever type of loan is chosen, it is wise to shop around and check what loan products suit best, and whether there are additional costs such as establishment fees.

Deciding what type of home loan involves some sort of risk. Hopefully, it will be a calculated risk, aimed at minimizing potential financial pain, and maximizing the benefits.