Hold up - America has something we don’t? 

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Yup, many things in fact (not all good), but there might be something we can learn from the USA’s property market. 30 year fixed rate mortgages.

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30 years sounds like a lifetime. What’s the deal?

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A fixed-rate home loan allows a home owner to lock in the interest rate for their mortgage repayments over a period of time. In Australia, the maximum term you can ‘fix’ your mortgage for is 5 years. 

However, in America, home owners can fix their interest rate for the entire duration of their loan, usually 30 years. This was a massive win for homeowners during the pandemic, when interest rates hit rock bottom and people were fixing their home loans at less than 2% 🤑

But interest rates are looking a little different nowadays...

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Who benefits from a 30 year fixed home loan? 

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🏡 People who want pricing stability. With the majority of Australian home-owners being on a partial or fully variable home loan, there’s always the risk that changes to the interest rate (like the RBA’s 13 consecutive cash rate hike) will impact borrowers’ ability to repay their loans - both positively and negatively.

But over the past few years, the increase in cash rate has seen variable home loan repayments skyrocket. In fact, an Australian with the average Australian home loan amount of $666,000 would have seen home loan repayments jump from ~$2,400 to ~$4,000 during the pandemic hikes.

By comparison, about 70% of American households are on a 30 year fixed home loan. When borrowers can fix their interest rate (therefore their mortgage repayments) for the entire loan, this gives them more peace of mind over their financial position. 

🦘 The Australian economy. Larry Fink, CEO of the $18 trillion asset manager, BlackRock, said in an interview that Australia’s consumers would have more confidence spending money and investing in equities if they were less worried about the ‘ups and downs of their mortgage repayments’.

Australia's reliance on the banking system, instead of capital markets, makes it ‘less attractive’ to entreprenuers. As a result, the Australian economy receives fewer opportunities for growth compared to America. 

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So what are the downsides to fixing your home loan for 30 years? 

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📈 Higher interest rates: Usually, fixed home loan rates are higher than variable loan rates because banks need to account for interest rate risk (when the RBA increases cash rates). 

📝 Break fees: In Australia, fixed rate mortgages are more costly to terminate or refinance before end of term. That’s because banks will often charge a ‘break fee’ as penalty for exiting the fixed loan early. In America, these fees are less common and home owners just need to cop a higher interest rate upfront.  

So are these trade offs worth avoiding the ups and downs of your mortgage repayments for 30 years? Some might say yes, others might say no. One thing’s for sure, Aussies love investing in property!