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.