As interest rates start to head north, the age-old question always crops up: should I fix my mortgage rate or not? Well there are pros and cons to every debate, but first let’s look at some facts.
FACT 1: Mortgagors (that’s you) tend to fix their home loan rate at the worst of times.
Five year figures from Datamonitor show that as interest rates rise, more people tend to fix their rates. This peaked in March 08 when around 24% of all owner-occupiers opted to fix either part or all of their loans. The trouble is that most lenders have already factored in increases.
The trick is to stay ahead of the curve. For example: those same people who fixed their rate in April 08 would have typically locked in a 3 year rate of around 8.90%. However since then, variable rates have been as low as 5.50%.
Conversely, if you had locked in a fixed rate when rates were going down – say January 09 – you could have got a 3 year rate of around 5.80%.
By January 2010 many analysts estimate that standard variable rates will be at least 6.50% meaning you would already be better off.
FACT 2: Fixed rates are generally higher than variable rates.
Most financial institutions offer fixed rates over 1, 2, 3 or 5 year terms. A 3 year term tends to be the most popular and is typically priced at 2 percentage points above the variable rate.
Rates vary from term to term and are an indicator of where lenders see the rate going in the future.
If you want to see the difference a 2% rate has to your current payments, just use our
home loan calculator.
FACT 3. No one can predict the future.
Predicting interest rates is not an easy thing. It’s a bit like trying to pick a ‘sure winner’ in the Melbourne Cup. You may end up being pipped at the post!
So on the downside, fixing your interest rate can be hit or miss. You need to do your homework and make an educated decision that works for you. Part of that homework is to understand all the terms and implications of a fixed contract¬––like the sometime hefty penalties for opting out before the expiry date. These are known as “break costs”. If your circumstances change and you need to change the structure of your loan, this cost can run into the thousands. So basically you are stuck with the fixed rate for the term you have agreed.
On the upside, a fixed rate does offer some security and budgeting comfort to mortgagors because you know what your repayments are going to be, month in month out (at least for the period of the fixed term.) You may also save money if market rates go up considerable over that period. For example banks’ standard variable rates rose by almost 3.5% between 2003 and 2008.
So what’s the solution?
Our crystal ball anticipates a number of rate rises in 2010. How many is anyone’s guess, but if you allowed say a factor of a 25 basis points rise each quarter, we may end up paying more than 2% more by Christmas 2010.
A growing trend has also been to split your mortgage 50/50 between fixed and variable.
The best solution will ultimately depend on your individual situation and getting the right advice.
Whichever way you decide to go, why not have a chat to one of our mortgage specialists who can tailor a package that’s right for you. Check out our
current fixed rates.
Sources: RBA statistics, Datamonitor