When is the right time to fix your interest rates?
It’s a great question, it always is. Timing is everything when it comes to fixing your interest rate or rates and we are coming into very interesting times.
Well, I shouldn’t say it’s just timing as the other important aspect is “why” you would fix. For some it makes sense, they are starting a family, reduced incomes or hedging in the case of many of our property investors – all very valid reasons.
With the world amidst a coronavirus outbreak and share markets and businesses around the world feeling the effects, the interest rate discussion has again been thrust into the spotlight and the urgent need to cut again is the lead story.
The Reserve bank has again cut interest rates from 0.25% down to the nominal cash rate of 0.10% to try and assist to boost the economy as we recover from the Coronavirus pandemic. But, yet again, the banks didn’t pass this onto most mortgage holders, instead they’ve shifted their focus to very low fixed rate options instead.
The Reserve Bank governor – Philip Lowe also stated that rates will unlikely increase for at least the next 3 years.
And so, the banks have been very aggressive with their fixed rate offerings of late. In fact, you can actually now lock in lower than the variable rates and almost all fixed rates start with a 2 and we even have fixed rate home loans from 1.98%.
Wow, I never thought I’d see it but its happening.
And whilst there was market disappointment with the banks not passing the cuts onto variable rate mortgage holders, it is a good time to consider your fixed rate options.
But should you fix?
It took years for the Reserve Bank to lower the cash rate by 25 basis points, despite a soft property market and global economic uncertainty.
I’ve had a lot of clients ask me if I think they should lock in a fixed interest rate now, believing that if it took the RBA this long, it’s unlikely rates could go any lower.
In fact, there isn’t actually much further to go in any case and I doubt we’ll see any more cuts as it’s just not having an impact, especially when not passed onto mortgage holders.
The economy is uncertain, both here and overseas, and the property market needs a bit more fiscal policy encouragement so that it can bottom out and begin its long-awaited recovery.
Our recommendations are never around “rate chasing” as such. Sure, the interest rates you can secure are very important as this directly correlates into what you need to pay weekly/fortnightly or monthly on your mortgage but the outcome of this is always far more important.
Know the risks
I’m always keen to discuss with clients the risks associated with fixing your interest rates.
We were recently introduced to a new client who wanted our assistance to get out of a fixed rate. Why you ask?
Well they went into a bank branch and were sold onto a very low rate – in fact fixed for 3 year at less than 3%.
But what the banker at the time didn’t look at was the fact that the clients had a significant cash savings amount sitting in their offset account and by fixing their rate – not explained to them by their banker – they lost the benefit of the offset account. So much so, that the clients, even with the very low fixed rate, are actually losing money due to the loss of the offset account. What a horrible outcome for them.
So here’s the main things you have to be aware of when fixing your interest rates:-
- You will lose the ability to have an offset account
- You will lose the ability to make bulk or lump sum reductions to the loan
- Any rate cuts in future won’t affect the fixed rate that you have
- You cannot move lenders during that time as you are fixed into them as well (or at least without penalty and the break costs or penalties can be significant)
- You may not be able to take the next step in your investing process as you are bound to that single lender’s rules
So for these reasons, you need to consider carefully why you might want to fix your interest rate.
The main advantage of a fixed rate option is the rate and repayment certainty. This, for many people, does outweigh the above risks or disadvantages and allows them to go about their normal daily lives with that security.
Consider all options before fixing
There are some great variable rate options around and should ensure that you either shop around or look at all your options and lenders before just committing with 1 lender and a fixed rate option.
Now, don’t get me wrong, if your circumstances align, then I’m not against you fixing – in fact for some of our investor clients, we already have been. But please do this with the advice and knowledge of it being the right outcome for you and not just rate chasing.
What if you move to a low fixed loan provider and then in 1, 2 or 3 years’ time they won’t assist you with what you want to do?
Can you split your loan?
Now this is where people can start to get strategic and have the best of both worlds.
Imagine having all the flexibility of a variable rate loan with your offset account and ability to make extra repayments etc. as well as the rate security of the fixed rate loan.
This is a great option for many people and one that is now becoming a more favourable in the current low rate environment.
It means having 2 loans – 1 fixed and 1 variable – but this way you can take advantage of both low interest rates and rate certainty as well as the flexibility of all the features of a variable rate loan as well as the potential for future rate cuts.
Please consider all options when you are considering a fixed rate option. I’m not saying don’t do it, I’m just saying be wary.
You need to consider all of your options and ensure that you are doing any fixing of your interest rates for the right reasons and to achieve the right outcomes for you.
Banks want to encourage new customers and they’re doing it by being very willing to do a good deal to win their business. And banks have an army of people looking at the interest rates and fixed rates and as a rule, they know more about the markets than what most people ever will.
Savvy borrowers are making the most of the current conditions, while keeping their options open for more rate cuts in the near future.
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