When should I fix my Interest Rate?

I’m often asked during the course of assisting clients with their loans, when should I fix my interest rate? To answer directly with a now or hold off 6 months is a dangerous path to tread, the last thing I want is to have a client come back to me in the future upset that I had told them to fix, only to have variable rates drop afterwards, or the opposite scenario where I had told them not to fix and rates start to climb. I simply don’t want to risk being the villain.

But I do want to help, as a Credit Advisor I take pride in educating clients and assisting them in making an informed decision for themselves.

So how do I answer that question, it’s simple. I present the facts and show the clients the big picture in the Australian interest rate cycle. After that, the decision is easy.

Whilst there’s generally a gap between fixed and variable rates they generally follow the same path in the interest rate cycle. If we take the historical trend of the cycle into consideration, at the high end rates are generally between 8-9%, whilst at the bottom end it’s somewhere between 5-6%. So consider where we are currently in the cycle, fixed & variable rates as low as 4-5%, historical lows.

Taking the big picture view makes the decision easier, taking the big picture view takes emotion out of the decision and helps you make it logical decision. If I fix my rate today at 4.5% I’m still lower than that historical low point in the cycle and yes I’m still taking a gamble, what if rates go lower.

Bob at the pub said his mate the banker said the inside word was another rate cut within six months, this economist that and that economist this, I might miss out, forget it. Take the emotion out of the issue and look at the big picture.

Yes should rates could go lower and yes you may miss out on an even lower rate but with rates as low as they are, by fixing at the low end of the cycle you’re still winning. You’re not making that knee jerk reaction at 7.5% where a lot of people do because the papers are spreading panic and printing all sorts of sensationalist speculation.  You’re not making a decision based on what other people are doing or someone at the BBQ on the weekend said that it’s time.

Ultimately, however, if you don’t have the luxury of waiting for the low point of the cycle, one must ask themselves why they want to fix their rate and I think 9 out of 10 times the answer is for the security of having a stable repayment. If the timing of the interest rate cycle is not ideal, your personal circumstances must be the major factor in making that decision. Perhaps a person is on maternity leave and the household is down to one source of income, a change of job/career is looming, whatever the circumstances, the reassurance of knowing exactly what you must budget each month to cover your home loan helps achieve a degree of peace of mind.

Other factors to take into consideration:

  1. How much in additional repayments can I make per calendar year on my fixed loan
  2. Is there an offset functionality available on my fixed loan,
  3. If not, should I consider a split loan with an offset linked to the variable rate loan
  4. Can I easily make changes to the repayment type on my fixed rate loan? i.e. from Interest Only to Principal & Interest repayments
  5. Is the loan portable, can I sell my property and buy another one during the fixed rate term
  6. What happens if I need to break the fixed term, what are the potential penalties?

For further information contact the Mint Money team today or call us on 1300 302 620