Fixed interest rates – Is now the time to fix?
As a broker, and especially in the current climate, every day I get asked the question “should I fix?”. It can be a difficult and confusing decision for most, so let’s take a look at the facts.
Fixed home loan rates mean that the interest rate you pay stays the same for the duration of the fixed rate term, which is usually between one and five years. So, whether the Reserve Bank of Australia (RBA) and your lender are cutting interest rates or raising them, your rates won’t be impacted. This means you’re safe from unpredictable market fluctuations. There can be a downside to this as well…you won’t benefit from decreased rates should they be lowered.
Currently, fixed rates are at historic lows with two-year fixed rates starting at 2.09%. Fixed rates are currently lower than variable rates with competitive variable rates sitting at around 2.7%.
The reason fixed rates are lower is because fixed rates are tied to swap markets, where investors go to buy and sell debt securities issued by corporations or governments, which are generally longer term – hence why fixed rates are currently lower, as they have factored in a future rate decrease. However, the reserve bank has stated they have no plans to lower the rate below the 0.25% and it will stay there until employment and inflation figures justify changes.
The downside to fixed rates is they are generally more restrictive in terms of making additional repayments and being able to redraw on the additional repayments. There are also very few lenders who allow for offset accounts on fixed rate loans.
Fixed rates also incur substantial break costs, fees charged by the lender when you pay off the loan earlier than the planned schedule or refinance and relate to economic loss by the lender on the day you break. You do not incur these fees with variable rates. So, a rule of thumb is if there is any uncertainly relating to your position over a period of time don’t fix.
Fixed rates also have plenty of benefits. A major one is the certainty of repayment meaning your repayment will always be the same for the fixed period, which given the current climate this certainty is something to love. It also means you can financially plan ahead and maintain a certain standard of living. Fixed rates can also protect you from sudden rate rises.
For variable rates to match fixed rates we would need at least two further rate cuts, given the RBA rates are currently at 0.25% if we saw two further reductions, we would move into a negative rates space which is hard to imagine – and the RBA has stated they have no intention at the moment to reduce the rate below 0.25%.
So, if the RBA changes nothing the only thing left is lenders competing with each other and squeezing their own profit margins to grab more business and the question will be how much appetite they have to do this? Lots of our clients are splitting their home loans and taking a percentage variable and a percentage fixed to get the best of both worlds!
It’s definitely a great time out in the market to be reviewing your loans. Ultimately fixing your loan doesn’t just come down to rates, it needs to be an informed decision which weighs up all the elements relating to your personal situation.
Get in touch with us if you’d like to talk through your situation and the available options.