Many borrowers try to lock in low fixed rate home loans when they think interest rates will soon rise. But most borrowers get that timing wrong. Right now, while official interest rates are set at an all time low level of 1.5 per cent, less than one in seven borrowers are choosing fixed rate mortgages.
More than 1 in 4 borrowers were choosing fixed rates in March 2008 when rates were set at 7.5 per cent. Over the next year the RBA slashed rates down to 3 per cent. That left hundreds of thousands of borrowers paying high repayments based on home loan rates of 9 per cent and more while their neighbour’s repayments were falling and falling fast.
Why do borrowers often get fixed rate loans wrong? Science has an answer. Apart from the fact that no one really can know where interest rates are heading in the future, human psychology also plays a part.
Most people dislike missing a bargain more than they enjoy grabbing a bargain – this is called loss aversion. You know it as that feeling you get when you lose some cash. That disappointment can be stronger than the happiness you feel when you find some cash.
In the mortgage market, even though now fixed loans are now available for well under four per cent, borrowers want to wait to see if rates will fall further. Because they will hate themselves for missing a bargain. But will rates fall again?
Are we at the bottom of the home loan interest rate cycle?
Mortgage interest rates are at record low levels. Borrowers can now get a great home loan deal, with an offset account, for under four per cent per annum. The RBA has the cash rate set at 1.5 per cent, where it has been since August 2016.
Now, in December 2016, the futures markets, the bond market and a majority of leading Australian economists are all now predicting that the next move for interest rates will be up. Just two months ago, most predictions were for more rate cuts by the RBA but that mood has shifted 180 degrees in a very short time.
So now SEEMS like a good time to lock in a fixed rate mortgage but …
So now looks like the bottom of the interest rate cycle and therefore is a great time to lock in a low fixed rate, right? Then all that’s left to do is sit back and count your savings when variable interest rates begin to rise, right? While your neighbours will be grumbling about higher repayments and banks that jack up rates, you will be happily paying your low fixed rate for the next few years.
Fixed and variable home loan interest rates have already begun to move upwards. Many lenders have shifted some of their fixed rates up and their variable rates as well. It seems like a good time to fix rates …
Don’t try to time the market, because you will probably fail
While rates seem to be moving up now, after long period of being set very low, timing the interest rate cycle is impossible, and most borrowers get it wrong. When rates do really start to get significantly higher, many borrowers then jump to fixed rates because they fear rates will rise even more. By then, fixing will be more expensive.
Financial planners often recommend that a decision about whether to fix a mortgage should be about managing your own cashflow, providing certainty to your budget and forget about trying to pick the rate market. Many investors like fixed rates because they can match the repayments to their income.
You can research and compare fixed rate home loans from all of Australia’s major lenders here.