Finance

Is Now The Best Time to Fix Your Home Loan?

Danny Masri - Thursday, July 28, 2011

Picking the right time to fix is always hard, especially when Westpac's Chief Economist, Bill Evans, has predicted a 1.00% rate cut by December 2012. As the looming RBA rate hikes seemed to subside, fixed interest rates on home loans have begun to fall. The gap between Standard Variable Home Loan Rates and Fixed Home Loan Rate has substantially narrowed over the past 6 months.

Lenders have slashed their fixed rate offering to within 9 bps of their variable rates. The aggressive move on fixed rate pricing can be viewed as a measure by lenders to lock in clients in the advent of exit fee bansintroduced by the Gillard Government from July 1, 2011.

However the stronger than expected June quarter inflation will leave the Reserve Bank with an interest rate dilemma: will the RBA's inflation fighters be forced to put up interest rates against a backdrop of global upheaval over debt?

When rates are expected to rise, how likely are borrowers likely to switch to fixed rate mortgages? If history is anything to go by, most Aussies will stick with a variable rate with all its associated flexibility. On average only 11.3% of all loans are fixed. Fixed rate home loans last peaking at 24.9% in March 2008 when the official cash rate was 7.25% and standard variable rate home loans were at 9.32%.

Late last year fixed rate popularity began to rise but soon waned as the fear of interest rate hikes evaporation.

Should I Fix My Loan?

It’s important to consider that fixed rate loans won't suit everyone. When locking in your loan, you’re betting on the variable rate averaging more than your fixed rate over the fixed term. Therefore when fixed rates are on par with variable rate it makes pretty good sense to fix.

With a fixed interest loan, there are usually restrictions on how quickly you can repay the mortgage. For instance, you may only be able to pay an extra $5,000 to $25,000 in repayments each year without penalty. And if you were to terminate your contract for whatever reason — even if you were just moving house — then you might find yourself faced with hefty break costs.

Fixed rates should be viewed more like an insurance policy against the effect of rising interest rates stretching your repayments beyond your finances and not an opportunity to beat the bank when rates rise.

Fixed rates would suit those who benefit from the certainty of knowing just what their repayments are going to be over the next couple of years or first home buyers not in a position to make extra repayments during the fixed term and enable property investors to better budget rent against interest and property outgoings.>

For many, hedging your bets may be the best option. Have some of your home loan at a variable rate and the balance at a fixed rate. That way, if rates rise, only half your borrowings will be hit.>

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