To Fix or not to Fix

That is the question I am asked just about every day.
It’s a tricky one to answer because, well, the truth is that understanding what makes interest rates move is a bit like trying to read Shakespeare at high school — the words are familiar, they’re definitely some kind of English, but you’re not reallysure what they mean.

Interest rates are about as predictable as the weather. And when asked about their likely trajectory, I often feel like the weather-presenter on the tele who confidently predicts“a 50% chance of rain tomorrow”.

It really is a bit like that.

Many volatile economic variables affect how interest rates fluctuate. We can look at patterns, historical rate movements and trends, and make predictions about how the future might play out with varying degrees of accuracy. But, just like the weather, there’s no guarantee that a particular set of inputs or circumstances will produce the same result each time. There’s some science to it, of course, but we’re not working with something as predictable as the daily ebb and flow of the tides. The ‘chance of rain’ analogy is much more apt.

In late 2014, for example, economists were almost unanimous in their predictions of an interest rate rise. Bank customers frantically went about locking in interest rates so as to avoid the‘inevitable’increase. Then overnight, just like that, chief economists across all the majors predicted rates were actually more likely to drop. Those quickest to act on the accepted view at that moment, locking in their home loan rates, lost when rates did drop.
So what should you do? Well, my job is not to tell you whatto do. But here are some inputs worth considering when pondering the‘fix’question:
  • 3 to 5 year fixed rates are still around the lowest interest rates we’ve seen in decades.
  • Sometimes it makes sense because of your stage of life to think about fixing your repayments for a certain period of time. For example, you might have kids in childcare and those expenses will reduce when they start school unless, of course, you go‘private’and fees will be ongoing.
  • ‘Fixing’ can be beneficial if you want peace-of-mind around budgeting.
  • Even if you fix, many lenders will allow you to make extra repayments of up to $10,000 a year.
  • Extra income you might get from a bonus, for example, cannot be paid on your fixed rate home loan, as you do not get the benefit of an offset account.
And if you do choose to fix your home loan, here are a few likely impacts:
  • Remember: You are entering a contract and if you break that contract by, for example, exiting midway through the fixed rate period, you may be up for significant‘break’costs. Break costs are economic costs to the lender. If the lender will be relending the money at a lower rate, you will be paying the difference.
  • Even though rates are at record lows, they may drop further. Fixing your rate means you won’t see any of that upside during the fixed term of your loan.
So where does that leave us? If it feels like we’re back to the‘50%chance of rain’ scenario, then you’d probably be right. So, you might consider popping an umbrella up over a portion of your loan by splitting it to be partially fixed andvariable.
In Shakespeare’s Antony and Cleopatra, Antony notes that“Sometimeswe see a cloud that’s dragonish. Sometimes there’s a cloud like a bear or a lion, a castle, a floating rock, a craggy mountain. Or it might look like a blue cliff with trees on it that bow to the ground. These things fool our eyes by seeming solid, when they are actually only air. You’ve seen these illusions. They’re spectacles that appear at sunset.”

That sounds like interest rates and weather to me.

Credit Representative 460913 is authorised under Australian Credit Licence 389328
Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply.

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