To Fix or Not to Fix.
With interest rates at historic lows in Australia when is the right time to fix your rates? Here are some things to consider.
How low can rates go?
There have been 2 rate cuts by the Reserve Bank of Australia (RBA) in 2016 to bring the official Cash Rate to 1.5%. Lower wholesale borrowing costs to the lenders was meant to result in them passing on the cuts to you, their customers. On both occasions the majority of lenders passed on less than the full 0.25% cut – which makes you wonder if they will pass on the full cut in full in future anyway. Add to this the fact that the RBA are running out of room to cut rates further must make you wonder – how much further can they go?
If you lock in your rate now, you won’t reap the benefits of later decreases but the question is, how low do you think the rate will go before it starts to climb back up? Timing is crucial if you want to lock it down at the lowest point.
Balancing your budget.
How are your budgeting skills? If you want to know your precise repayment obligations for the next one, three or five years, then a fixed rate term can give that to you. Be aware that the length of the fixed term will determine the fixed rate. Currently, 2 and 3 year fixed rates are cheaper than variable rates whereas, 5 year fixed rates are more expensive.
Fixed or Flexible?
Fixing a rate denies you some flexibility. Once you set a rate some lenders won’t let you make extra repayments to reduce your principle. That means that if you come into some extra money, such as a bonus or an inheritance, you lose the opportunity to make what could be a sizeable dent in your mortgage. However, once the fixed period is finished, you can then make further repayments.
Indecisive? Split it up.
Both variable and fixed rates have their positives and negatives, and which one outweighs the other is usually decided by personal circumstances.
A key strategy is to split your loan into two – with a variable split and a fixed split. This enables you to fixed half of your debt at current rate to protect you from a large increase in repayments should the interest rates increase and assist in budgeting. Having a variable split enables you some flexibility and will allow you to make extra repayments if required.
If you would like to know the current fixed rates for your lender, feel free to send an email to [email protected] or call 1800 195 123.