home loans - to fix or not to fix?
13 Feb 2012
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It wasn’t that long ago when interest rates were skyrocketing that most mortgagees were wondering when was the “right time” to fix their interest rate. Then rates dropped to their lowest in four decades and many people were faced with the same dilemma – “when do we fix?”!
The Reserve Bank of Australia held firm at their monthly meeting last week, however both ANZ and Westpac were quick to announce their decision to raise their interest rates regardless. At the time of writing both NAB and CBA are considering their options.
So what action should we take? Nobody really knows, not even the experts, what the Reserve Bank of Australia will do with interest rates each month.
Regardless of whether rates are going up or down, before you act, carefully consider both sides - the advantages and disadvantages of fixing your interest rate.
advantages
The obvious advantage is that when you fix, repayments will not increase with rising interest rates. Further, you know in advance what your repayments will be for the fixed period, and you can usually choose periods of between one to five years. This can be helpful if funds are tight.
disadvantages
But what are the disadvantages? Clearly the biggest is what happens during an economic downturn - borrowers having to repay at the fixed interest rate they chose as they watch the variable rate drop to lower levels. In addition, the fixed rate is generally higher than the standard variable rate and usually establishment fees are charged. Importantly, if you break a fixed rate loan before the set period has expired, you will face penalties.
focus on the average
Many borrowers will think it’s best to pay a bit extra and tie in to a fixed rate than gamble with potential rate increases. But you should never just compare the fixed rate to the variable rate… it’s the average of the variable rates over the coming three years that is your best indicator.
Unfortunately, nobody will know what variable rates will be over any lengthy timeframe, but to give an indication based on past results, there have only been three periods since 2000 when fixing for longer than two years has been a positive move. This occurred in the second half of 2001 (following September 11), in 2006 and in early 2009 due to the drastic reduction in interest rates following the Global Financial Crisis. Who knows if 2012 will be another of those occasions? We will just have to wait and see.
So if you’re thinking of changing to a fixed rate, think carefully and do the sums. Life is about choices and nobody should make this decision for you. In the meantime keep paying your mortgage off regularly and make additional payments when you can afford to.
sources:
www.rba.gov.au, “F05 Indicator Lending Rates”