Fixed interest rates are trending downwards so is now a good time to lock in your home loan?
BY ELIZABETH ALLEN
To fix or not to fix? That is the question occupying many home borrowers’ minds.
For those who were caught with high fixed rates as variable rates plummeted during the global financial crisis (GFC), the memory probably produces a resounding ‘no’ today.
The percentage of borrowers with fixed rates dropped from about 25 per cent in early 2008 – pre GFC – to only three per cent a year later.
They have remained at this level until the middle of this year but fixed rate loans are now on the rise, comprising 5.1 per cent of all mortgages written in August, according to the mortgage index of the Australian Finance Group (AFG).
Large Australian credit union, CUA, this week cut its three-year fixed rate to 6.75 per cent and several other big lenders have reduced rates on their fixed products.
API asked a range of experts if now is indeed the time to ‘fix’.
Finance broker and director of Metropole Finance Rolf Schaefer says fixing can be a good idea if money is tight.
“My opinion is that the timing is good if your cash flow is tight or if you only fix 25 to 50 per cent (of your loan); and then only fix for three years, not five years,” he says.
“Five years is too long to know what is going to happen. My wife and I, when we have fixed it for five years, we always get it wrong. With three years, we have got it right.
“There are some great offers out there on fixed rates at the moment if you’re worried about your cash flow.”
Schaefer says a variable rate wins out over a fixed rate in “80 per cent of cases”.
“But sometimes there are very short windows of opportunity to get it right (with a fixed loan) if the interest rate is right; if it’s below seven per cent. This is below most banks’ standard variable rate and getting a fixed rate below that, you can’t get it much wrong.”
Schaefer warns that penalties apply if a fixed loan is ended prematurely.
“There’s a break fee to be considered so you have to be pretty sure this is a loan you want to keep for three years,” he says.
Finance journalist Michael Pascoe says fixing a home loan is “effectively like paying an insurance premium against repayments going higher than you can afford”.
“It’s not a straightforward decision because the individual is always betting against the money market,” he says.
Can a fixed rate beat a variable rate over time? “It depends if you get lucky or not,” he says. “I can’t tell you which six numbers are going to win Oz Lotto next week or what interest rates will be in 12 months time.”
Pascoe says the decision to fix should be based on how vulnerable your finances are.
“If you’re at your limits and another one per cent would break you, I would fix,” he says.
But he says a fixed rate sitting below the variable rate is an indication by the money market that interest rates are going to fall.
“There’s no guarantee; you can make money or lose money one way or the other. The key thing is what is the risk to you of the rates rising, rather than you getting it right. If the rates are reasonably attractive, you can always hedge your bets and go half and half.”
Property investment strategist Margaret Lomas doesn’t advocate fixing loans.
“It’s probably never the time to fix your loan,” she says. “Fixed rates are usually slightly above the current variable and you’re taking the punt that when the variable rate goes higher than that you will be better off because you have the fixed rate.
“The most common terms for fixed rates are two or three years; very few people would fix for more than three years. By the time you take into account tax breaks on your (investment) loan, the variable rate would have to go above the two-year fixed rate within the first six months, and for a three-year term within the first 12 to 18 months, so that’s probably unlikely to happen.”
Lomas says the fixed rate is generally half to one per cent higher than the variable rate.
“Professional package discounts bring the variable rate down so you’re looking at a pretty big gap between the variable and fixed rate,” she says.
“In a nutshell, at the moment we don’t have any startling indicators that we are in a runaway interest rate environment. Interest rates are still too stable to make the gamble pay off.”