THE interest rate two-step is back in swing as homeowners and would-be property buyers make the difficult choice between taking on a discounted fixed rate or sticking with a variable mortgage.
A raft of fixed rate cuts during the past few weeks has raised the question again for borrowers: Should they fix or float?
After leaving rates on hold again last week, most money market analysts and economists don’t expect the Reserve Bank of Australia to increase the official cash rate for the remainder of the year.
Many are even predicting no movement until after June next year and even then, it’s almost 50-50 whether rates will go up or go down.
Ongoing global financial problems, a roller-coaster share market and unstable Australian dollar mean the traditional interest rate predictors can no longer be relied on. But as with all previous market cycles, to fix or float will depend on your personal situation.
Actuary Rice Warner principal Alun Stevens says the interest rate yield curve currently shows a dip during the next few years before returning to its current level.
For investors and homebuyers, this means there is a window where interest rates are expected to be lower – only by one percentage point or less – but for some people that could provide much-needed savings.
“That little bit of difference would suggest that funding costs in the next two to three-year period are going to be a little bit cheaper,” Stevens says.
“A half a percentage point for someone on a $400,000 mortgage means a $2000-a-year saving, which means there is some potential for upfront savings. But this versus what might occur over the longer period. After all, mortgages are usually held for about 10 years. “
“The real benefit that can come from a fixed rate mortgage is the fact that it is fixed, particularly for people who have borrowed close to their limit. It acts as an insurance element for them by locking in their repayments.”
Financial planner Glenn Fairbairn, a director at Hewison Private Wealth, agrees: “If you are walking a financial tightrope and any interest rate increase could put you under financial stress, then fixed rates are perhaps a better way to go”.
But trying to pick the best time to fix rates is fraught with danger, and the last thing you want is to lock in a rate only to have the variable rate plunge below it, Fairbairn says.
“History has shown that, on average, borrowers are much better off being variable,” he says.
Resi Mortgage chief executive Lisa Montgomery says competition between lenders is very strong, especially with fixed loans, as many lenders have been reducing them.
“With fixed rates it’s all about timing and because we have been living in the shadow of higher rates for the best part of this year lower fixed rates are increasingly appealing,” Montgomery says.
“A decrease in fixed rates usually signals that variable rates are on the way down – so you want to be certain that you don’t lose out once you lock in your loan,” she says.
“Remember that it will either be you or the lender that will profit from your decision to fix – if variable rates go down you could end up stuck on a higher rate.”
Fixed loans are more flexible these days but they still have restrictions, particularly about making extra payments and break costs if you want to pay off the loan or switch mid-term.
“You may want to consider splitting your loan – fixing some and keeping the rest variable,” Montgomery says. “This way, you hedge you bets on the future of interest rates.”