by Paul Franks
With what are historically some of the lowest rates we have ever seen, many clients are asking should they fix the interest rate on their home loan now.
How did we get here?
The main reason for the low current interest rates is the impact of the COVID-19 recession on the economy. We saw high unemployment, the economy was in reverse, and the rest of the world was in a similar situation. The government then stimulated the economy through the biggest spending package in history and the Reserve Bank reduced interest rates to historically low levels. The aim was to drive the economy out of the recession, and it worked quicker than most predicted.
So, a one-off unusual global event was the catalyst for the lowest interest rates ever in Australia, and similarly around the world. With that in mind, it looks unlikely that rates will staying at the current levels for a long period of time.
In fact, some banks in recent days have started to increase their 4- and 5-year fixed interest rates even though the Reserve Bank has stated they will not increase interest rates for the next 3 years.
Before fixing your home loan interest rates, you must weigh up and know the risks of fixing.
- With a fixed rate loan, you are generally limited (depending on the lender) to having no offset account, which many people have with a variable loan.
- Fixed loans allow only a small lump sum reduction each year and nothing more than that amount. For instance, some banks limit this to $25,000 per year, some limit it to 5% of the loan amount, etc.
- Any future interest rate cuts to variable interest rates will not reduce your fixed interest rate.
- You are unable to change lenders in a fixed period without the risk of a financial break cost.
When is the best time to fix?
If you had a crystal ball, then fixing at the lowest interest rate in the interest rate cycle would be the obvious answer. In practice though, this is very difficult to predict because fixed interest rates can rise before variable interest rates reach the lowest rate in the cycle.
Because of the unusual circumstances created with COVID-19, we currently have fixed rates from many lenders lower than variable rates. So fixing rates now can result in savings straight away. Historically, fixed interest rates are generally higher than variable rates due to the expectation of higher future interest rates – with COVID-19 this has changed, for now.
Why should I lock in fixed rates?
There are a number of reasons why it can be a good option to fix interest rates on your home loan for the future.
- To ensure affordability of home loan repayments into the future.
- To reduce the risk of future interest rate increases, which will increase your variable home loan repayments.
- If you have high levels of debt, then fixing can ensure affordability and certainty for the fixed rate period.
- With high levels of debt, a small increase in interest rates can impact on family budgets significantly.
- Making sure that you have your structure right between fixed and variable is just as important as the rate.
Considering the current interest rate cycle, the economy, current Government and Reserve Bank projections, it looks more likely that interest rates will rise in the coming years than decrease. On this basis, we recommend considering fixing some or all of your home loan debts.
By Paul Franks & Ashlee Salamon
How We Can Help
To discuss your personal circumstances, just contact us below or call (02) 4969 6600 and one of our advisors, in conjunction with our finance broking team, can look at whether you have the most favourable lender, structure, rate and loan type for your needs.