To Fix or not to Fix
It is fair to say that when it comes to interest rates, we are all in uncharted territory. The last year has seen records break every time rates are reduced and with at least another rate drop expected early next year the trend of record low interest rates is set to continue.
But what does this current super-low interest rate environment mean for fixed rates. I am being asked regularly if we should take the opportunity to fix in a rate now? With fixed rates being offered around the 2.79% it certainly sounds like a good option.
Here are a few concepts to consider when weighing up fixed verse variable rates in the current environment.
First thing to remember is that the bank will always win. Don’t try and out-smart the bank. Just like the house always winning at the casino the same applies with fixed rates at the bank. The banks economists have already made a very safe bet as to what rates will do over the fixed period and then they added a profit buffer to make sure. Of course, they don’t win 100% of the time but the odds are more in their favour not yours.
It is also worth understanding that the RBA Governor, Dr Phillip Lowe continues to publicly explain that the economy will be slow and thus interest rates low for a long time to come. The Australian economy will not pick up pace quickly and world economic pressure will continue to keep rates at these historic rates for some time.
So, fixing for one, two or even three years is probably not going to save you much, if anything and could end up costing you if rates stay low or drop.
If you are going to fix your rate be aware that most banks do not allow 100% offset accounts on fixed rate mortgages. We have two or three lenders that do allow offsets on fixed rates, so chat to us about these options.
Similarly, fixed rates carry some hefty exit fees if you have to break the mortgage during the fixed rate – which happens more often than most expect.
Where fixing does have merit is to lock-in your repayments. Locking your repayment sis a great option for investment properties where you will know the rent and fixing your repayments can simplify the investment. First home owners can also benefit from knowing there repayments will not change for the next few years. Knowing your repayments makes budgeting much easier.
Another worthwhile consideration is fixing for a longer time period. Five, seven or even ten year fixed rates can prove a successful strategy. Fixing for five years at 2.8% or seven years for 5.5% is an attractive option for long-term piece of mind.
With these considerations there is unfortunately no straight up answer. With variable rates for owner occupier in the low 3% zone and fixed rates at 2.8-3% and considering at least one more rate drop early next year there really isn’t too much value in the fixed rate.
However investors are paying an extra margin on their variable rate so the fixed rates pose a more attractive option.
Fixed or variable will boil down to personal circumstances and personal choices. Fixed rates are changing regularly. If you would like to investigate fixed options further please contact us to prepare a comparison or fixed options and discuss your requirements.