With banks around the country slashing their fixed year rates to under 5.00%, the question now on everyone’s lips is: should I fix? Mozo turned to ING DIRECT’s Treasurer Michael Witts to share with you his view on whether it’s a good time to fix. Here’s what he had to say.
Is now a good time to fix? This question, perhaps more so than any other, is always lurking in the back of people’s minds when thinking about their mortgage. After all, interest rate markets are always changing and it’s difficult to predict what’s going to happen next.
From my perspective, trying to pick interest rates is a mug’s game, as you only ever really know with certainty the day after it happens. Rather than basing your decision to fix on what’s happening with interest rates, I think a better approach is to take a holistic view and consider the general implications of fixing, including benefits and potential costs.
Mortgages are generally available with two types of interest rate:
- Variable rates, which tend to move up or down in line with short term interest rates changes and often closely following movements in the Reserve Bank cash rate; or
- Fixed rates, whereby the interest rate is fixed for a nominated period, for example 3 years. This means that, regardless of what happens to variable mortgage rates, the rate on your mortgage is unchanged for the duration of your agreement. In this example it would be three years.
The main benefit of a fixed rate mortgage is the certainty it provides in terms of repayments. From a budgeting viewpoint you know exactly how much your mortgage will cost you each month, so it can be a useful way to manage your income and expenses.
But what if variable interest rates go down? Yes that’s right, just as you were thinking, if you have a fixed rate mortgage then you will not benefit from the lower variable rate.
To guard against this risk, many people take out a mixture of variable and fixed rate loans. While there is no magic proportion which should be fixed, often people choose to fix between 50 -75%.
For example, if you take out a fixed rate on 70% of your mortgage and a variable rate on 30% of your mortgage, you would be able to take advantage of any possible fall in interest rates on the variable rate which applies to 30% of your mortgage. Equally, if variable rates increase you would pay a higher rate on only 30% of your mortgage. The repayments on the 70% that is fixed are unchanged in either of these scenarios.
Bear in mind, if you decide on a fixed rate mortgage and need to repay the loan before the end of the fixed period (if your circumstances change perhaps), then there may be additional costs involved – for example, if fixed interest rates are now lower than when you first agreed to the fixed rate mortgage.
In summary, if you’re tempted to base your decision to fix upon whether interest rates are at their lowest, then remember there are no guarantees as to what interest rates will do in the future. On the other hand, a fixed rate mortgage can help you manage your personal finances by guaranteeing your repayments will stay the same over a set period of time. Either way, make sure you take a holistic view and be aware of the potential watch-points as well as the benefits.
The information does not constitute financial advice. It does not take into account your objectives, financial situation or needs and ING DIRECT recommends you seek independent financial advice.