To Fix or Not to Fix?

• by Fend Finance
• January 18, 2016 11:43 am
• Leave your thoughts

You can almost guarantee that on the first Tuesday of each month, many of the major Australian news outlets will report on what the Reserve Bank of Australia (RBA) have decided to do with interest rates. It’s a hot topic and rightly so, with thousands of Australians working diligently to pay off their mortgage. Any increase or decrease in rates can be a cause for commiseration or celebration each month.

I often get asked by clients, potential clients and friends at BBQ’s, what I think interest rates are going to do over the coming months and year. If I was able to predict those rate movements, I’d be a genius (If only)! The truth is, no one can accurately forecast what will happen in global or local markets at any given time and as a result, you will never be able to get the prediction right consistently. It’s best to leave these sorts of predictions to fortune tellers. However, if you do have a mortgage, there a number of things you can do to protect yourself if rates increase, and provide you with some benefit if rates decrease.

They call it “Fixing”

Fixing your mortgage to a specific interest rate that’s offered by the bank for 1, 2, 3, 4 or 5 years is something a lot of mortgage holders think about. It’s important to weigh up the benefits of fixing some or all of your mortgage, versus the pro’s and con’s of remaining on a variable rate.

Benefits of fixing:

– Fixing some or all of your loan, gives you a degree of control over your repayments. You can be certain that your repayments will remain the same for the time you’ve elected to fix your mortgage for.
– For example, if you choose to fix your $500,000.00 mortgage rate for 3 years at 3.94% with principal and interest repayments over 30 years, then you are guaranteed to pay $2369.80 for the next 3 years. This gives you security and peace of mind over that time.
– An additional benefit, is that if rates increase over that 3 year term, then you could save a substantial sum in interest for those 3 years (assuming rates remain higher than what you fixed at).
– By fixing part of your mortgage, you effectively have a “hedge” or an each way bet on what rates may do. If rates increase, then the variable portion of your loan will increase (increasing your repayments), whilst your fixed portion remains at the agreed rate. Similarly, if rates decrease, your variable portion will reduce (lowering your repayments) whilst the fixed portion remains the same.

Downside of fixing:

– If you fix and rates begin to decline, then you will have locked into paying a higher price for the mortgage you have taken out. This is one of the major risks with fixing.
– Whilst having a guaranteed interest rate and repayment amount provides peace of mind, that peace of mind could prove costly over the term of your fixed rate should rates continue to decline.
– If you elect to fix a portion of your mortgage and you have an offset account attached to your loan, the benefit of this can be negated. Many banks impose restrictions on the use of offset accounts on fixed rate portions of mortgages. Many will only “partially offset” the money you have in this account against the loan. Whilst this is improving, there is still a lot the banks could do to provide a full offset feature on fixed rate loans.

What should you do?

A great place to start is to think about your attitude toward risk. Are you conservative with your money and don’t like taking any risks? Perhaps you like to take calculated risks or enjoy living on the edge! Either way, there a lot of options that cater to every customer’s risk profile. As always, speaking with a qualified Mortgage Broker, Financial Planner or Accountant can help set you on the right path.
The moral of the story when it comes to fixed rates is buyer beware! Do your research, know your risk appetite and have some trusted advisers by your side to help guide you through the process.

Note: This blog provides discussion on mortgage and other credit related topics that are general in nature and should not be construed as an offering of advice. None of the topics or comments take into consideration your personal goals or objectives. You should consider whether the information is appropriate for your needs and where appropriate, seek professional advice from an Accountant or Financial Planner. In the case of Mortgages or other related personal credit, advice from a licenced Mortgage Broker is recommended.

Categorised in: Home Loans

This post was written by Fend Finance