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Interest rates: To Fix or Not to Fix?

Interest rates: To Fix or Not to Fix, That is the Question

With the mortgage interest rates at historic lows and some economists predicting they may soon go lower, if you haven’t already asked your mortgage broker to check your loan against the market, you should do.


However, if you believed the economists in 2013, when many predicted interest rates would rise, and obtained a 3-5 year fixed rate loan at or above 5%, you have suffered a double whammy. You have not only paid thousands of dollars in extra interest as rates have fallen but face paying further thousands of dollars in break costs if you refinance. While it is definitely worth doing the maths and checking if the interest rate saving outweighs the break costs, for many, they will be stuck with their fixed rate until it matures.


Interest rate movements are notoriously difficult to predict. This is because the RBA’s monetary policy influences them to manage our economy: dropping rates in bad times, hiking them in good times. Other reserve banks and governments around the globe do the same. Australia does business with these other countries, including borrowing money from them. Hence, their interest rates influence our interest rates, some more than others. Therefore, unless you have a fully functioning crystal ball, picking the top or the bottom of interest rate movements is foolhardy, in my view (apologies to those who attempt to make a living out of it).


As homeowners, most of us will have a mortgage for 20-30 years. Therefore, we will live through many interest rate cycles. When the economy is doing well, and our jobs secure and businesses growing, interest rates will be a little higher. When times are tougher, like now, they will be a little lower. The important thing is that the amount of debt we hold is affordable through these cycles.


If it is important to you to have a high level of certainty around your monthly expenses, then fixing the rate on part of your mortgage can make sense. But remember, your lender is not offering you the seemingly attractive fixed rate to lose money. Fixed rate loans come with strings attached. Often there is a limit on extra repayments and an offset account may not be available. There will also be punishing break costs if you sell, refinance or repay before the fixed term.


Often the flexibility of a variable rate loan, particularly if you make full use of an offset account by running all of your income and expenses through it, will save you far more over the life of your loan than trying to beat the banks at timing interest rates. The important thing is shop around and do so again every couple of years throughout the life of your loan.


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