Mortgages & Lending: to fix or not to fix?

With official cash rates on hold for just over 2 years, is now the time to fix your home loan interest rates?

David SeymourIt would be crystal ball gazing to suggest where interest rates are going. We will leave that up to the economists. Some of the trends we are seeing are:

  • Lenders making small adjustments to variable rates as they jockey for position in a competitive market
  • A number of lenders offering special offers to new customers only (meaning existing customers are left on higher variable rates)
  • Mutterings from banks that they are under increased pricing pressure to increase rates
  • Those same banks reducing fixed rates

There is a genuine lack of consistency in the approaches to interest rate pricing from banks.

There is number of factors suggesting rates should stay the same, including:

  • The Reserve Bank targeting inflation bands in the 2-3% range (which generally mean interest rates hover just above this range)
  • A lack of inflationary pressures
  • Loan books becoming a better credit risk thanks to more intensive lending scrutiny

But there are also risk factors including:

  • Banks seeking a better return on their investment
  • Increased compliance costs
  • Reduction in interest only lending, reducing interest revenue

So what to do?
If you are fixing rates to beat the banks at their own game, best of luck to you. It is unlikely to happen. At one stage you will be in front, at other points you will be behind. Just remember that the banks employ highly paid professionals to work out where interest rates are going.

You should fix your rate when:

  • You are concerned or convinced that rates will rise
  • You want certainty

Remember, there are risks in fixing your interest rate:

  • If interest rates fall you are stuck on a higher rate
  • If you decide to sell or wish to refinance or renegotiate your loan considerable exit costs can be incurred i.e. a 2-page formula aimed at compensating the bank for any lost revenue
  • There can be restrictions on your ability to make additional repayments as well as associated fees
  • There can be restrictions on your ability to access any additional repayments that you have made

One tool that borrowers use is to split the loan so that part is fixed and the other part variable, so you get the best of both worlds.

When considering fixing your rate, talk with our mortgage professional. David will take into account your intentions for the loan and security property, market conditions and offers that are available to you.

David Seymour is an Authorised Credit Rep No 477331 of Regional Finance Solutions Pty Ltd ABN 71163893945 Aust Credit License 484980.