Should I fix my interest rate?
The million dollar question on every borrower’s lips at the moment is: do I fix my interest rate or go with variable? Picking interest rate movements is not an exact science and has possibly never been more difficult than it is today.
What do we know? We know that the Reserve Bank of Australia (RBA) has increased the cash rate five times in the last seven months to 4.25 per cent. We know the governor of the RBA Glenn Stevens anticipates interest rates will continue to rise as the economy improves; and we know some banks still need to increase rates over and above RBA movements to recover higher funding costs.
Homeloans general manager of operations, Scott McWilliam, says it is, however very difficult to pick the top and bottom of an interest rate cycle, even for the experts.
"Treasurer Wayne Swan recommended that borrowers seriously consider locking in their mortgage repayments in early to mid 2008 and less than 12 months later the cash rate had dropped by more than four per cent," Scott said.
"This just goes to prove that if the experts can’t predict what rates will do, what chance do the rest of us have?"
Instead of looking at fixed interest rates as a way to potentially save money, you could consider fixing as a potential insurance policy. If you can afford for interest rates to continue to rise then it could be argued that you are better off not fixing and taking advantage of the lower variable rates today. On the other hand, if you cannot afford for rates to move higher (or higher than the fixed rates offered today) it may be a good idea to contact your financial institution to discuss your fixed rate options.
Another popular structure is to only fix part of your loan. It allows you to take advantage of the lower variable rate today and also gives you some peace of mind that a portion of your loan is fixed.
Remember the decision to fix or not is personal and everyone’s financial situation is different. You must also consider the terms and conditions that prevail during a fixed rate period. For example, you will only be able to make minimal, if any, extra loan repayments and you may be liable for substantial break costs if you discharge early. It is a good idea to speak to a financial adviser and your financial institution before making any changes to your home loan to ensure that you fully understand how it will affect your financial situation.
The above article does not constitute advice and should be considered as commentary only. Homeloans recommends that all potential borrowers should seek independent financial advice prior to making financial decisions.