To Fix Or Not To Fix

08th Nov 2018

With official cash rates on hold for just over 2 years, is now the time to fix your home loan interest rates?

It would be crystal ball gazing to suggest where interest rates are going. We will leave that up to the economists. Some of the trends we are seeing are:

Lenders making small adjustments to variable rates as they jockey for position in a competitive market
A number of lenders offering special offers to new customers only (meaning existing customers are left on higher variable rates)
Mutterings from banks that they are under increased pricing pressure to increase rates
Those same banks reducing fixed rates

There is a genuine lack of consistency in the approaches to interest rate pricing from banks.

There are number of factors suggesting rates should stay the same, including:

The Reserve Bank targeting inflation bands in the 2-3% range (which generally mean interest rates hover just above this range)
A lack of inflationary pressures
Loan books becoming a better credit risk thanks to more intensive lending scrutiny

But there are also risk factors including:

Banks seeking a better return on their investment
Increased compliance costs
Reduction in interest only lending, reducing interest revenue

So what to do?

If you are fixing rates to beat the banks at their own game, best of luck to you. It is unlikely to happen. At one stage you will be in front, at other points you will be behind. Just remember that the banks employ highly paid professionals to work out where interest rates are going.

You should fix your rate when:

You are genuinely concerned or convinced that rates will rise
You want certainty of repayments

Remember there are risks in fixing your interest rate:

If interest rates fall you are stuck on a higher rate
If you decide to sell or wish to refinance or renegotiate your loan there can be considerable exit costs to do so (this is a 2 page economic formula and is aimed at compensating the bank for any lost revenue
There can be restrictions on your ability to make additional repayments as well as associated fees
There can be restrictions on your ability to access any additional repayments that you have made

A common tool that borrowers use is to split the loan so that part of the loan is fixed and part is variable. This way you get the best of both worlds.

When considering fixing your rate, talk to your mortgage professional – they should take into account your intentions for the loan and security property, market conditions and offers that are available to you.

Whatever you do, steer clear of the crystal ball.