I’ve never been an advocate of fixing a home loan, it’s been my experience that so many things can change over a typical fixed rate period, that locking in for three to five years is just too lengthy. Getting out of a fixed rate loan can be extremely expensive before the time expires, so a lot of planning and thought needs to go into making a decision to fix your home loan.
Having said that, over the years there have been certain times when fixing has been a smart option, I mentioned to a family member that it may be a good idea to fix at 6.49% several years ago well before the global financial meltdown. At the time rates were around 7% and edged up to 9.5%. Then almost overnight due to the GFC, they fell to 5.5% just as her fixed rate expired. Timing is everything it seems, she never did thank me for it either. The flip side to that story is that I saw many people fix their loan at well over 8% because rates looked like going much higher and they panicked. A lot of those people would still be locked in at 8% today, and would have missed out on the lower rates that we have seen for the past 2 years.
Trying to predict where interest rates will go is real crystal ball stuff, and I would never tell a client when they should or shouldn’t fix their loan. I’m always happy to show them the pros and cons though.
With the standard variable rate in Australia hovering at around 7.8% and 3 year fixed rates at around 6.5% with many lenders, it’s a fair bet that the banks are expecting a fairly stable period when it comes to interest rates, some experts are predicting that rates could dip, others are saying that rates could remain unchanged for the rest of the year at least. One thing I’ve learned in my time is that banks are
pretty accurate when it comes to forecasting, so if you think you can outsmart them, I’d think again.
Banks are heavily discounting their variable rates right now as well. No one really should be paying the standard variable rate of 7.8%, if you are, speak to a broker or your lender to see if they can arrange a better deal. With the right circumstances you can get a variable rate well under 7% right now. Obviously if you are on a good variable rate and we get a .25% drop in interest rates before the end of the year then fixing may not be that attractive to you.
Investors may be more inclined to fix though, if you can lock in a rate of 6.5% or lower on your investments and it’s your intention to sit on those investments for the next 3 years and not sell, then it’s worth seriously considering your options. There is a lot to be said for knowing what your costs will be for an extended period like that when investing. If you think it’s for you, don’t just simply lock in, speak to a broker to ensure your loans are set up correctly and ensure that you are getting the best possible rate.
Our economy has never been more complex or volatile. If it wasn’t for mining Australia would be in a much more precarious position, and I’ve never seen the USA or Europe in worse shape financially. Inflation is the major driver when it comes to interest rates, and while so many countries are in recession, Australia’s economy would need to be completely bullet proof to withstand the fall out that is being experienced around the world.