Is it the right time to fix a home loan?

The Reserve Bank has cut interest rates by a quarter percentage point to a historic low of 2.75% so it doesn’t surprise me when people start asking when the “right time” will be to fix?

Australians now understand more than ever how the Reserve Bank of Australia uses interest rates to manage the economy. So for any mortgage holder the question of fixing your mortgage interest rate is always a very important one.

Regardless of whether rates are going up or down, before you act, carefully consider both sides – the advantages and disadvantages.

The obvious advantage is that when you fix, repayments will not increase with rising interest rates so you know in advance what your repayments will be for a fixed period, and you can usually choose one to five years. This can be helpful if funds are tight.

But what are the disadvantages? Clearly the biggest is what is happening now – borrowers having to repay at the interest rate they fixed at as they watch the variable rate drop to record lows. In addition, the fixed rate is generally higher than the standard variable rate and sometimes set-up fees are charged. Alternatively, if you do take the fixed option and then break the loan before the set period has expired, you can be hit with penalties. This can happen if you move houses or are forced to sell.

Focus on the average

Many borrowers will automatically think it’s best to pay a bit extra and tie in to a fixed rate than gamble with potential rate increases. But you should never just compare the fixed rate to the variable rate… it’s the average of the variable rates over the coming three years that is your best indicator.

Unfortunately, nobody will know what the variable rates will be over any lengthy timeframe, but to give an indication based on past results, there have only been three periods since 1990 when fixing for longer than two years has been a positive move. This occurred in 1993/94, in 1998 and in the second half of 2001 (following September 11). Who knows if right now will be another of those occasions? Nobody.

So if you’re thinking of changing to a fixed rate, think carefully, do the sums and talk to your financial adviser about your personal situation. Life is about choices and nobody should make this decision for you. The only suggestion we make is to keep paying your mortgage off regularly and making additional payments when you can afford to.

Olivia Maragna is the co-founder of Aspire Retire Financial Services and has been recently named the Australian Adviser of the Year. She is providing finance advice as part of brisbanetimes.com.au’s Good Advice project. Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Send your finance questions to Olivia at scoop@brisbanetimes.com.au

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