Is it time to fix the rate on your mortgage?
The Reserve Bank has kept interest rates on hold over the past few months, but there is some expectation among forecasters that rates may begin to rise again before the end of this year.
A quick glance at the Reserve Bank’s Cash Rate Target shows dramatic variations in the cash rate over the past two decades, from a record low of 3.0 per cent in April 2009 and climbing as high as 17.5 per cent in January 1990.
While there is never any real certainty over which direction interest rates are heading, there is always the possibility of fixing the interest rate on your home loan. The key benefits of setting a fixed rate is that it provides certainty over the timeframe of your loan and is a way of managing the risk of rising interest rates.
However, there are a few issues to be aware of before deciding whether the fixed rate loan is suitable for you:
– There are usually very high exit fees associated with fixed loans if you decide to switch back to a variable loan (for example, if interest rates fall dramatically).
– There is generally less flexibility if you would like to pay off your loan more quickly.
– The fixed interest rate is often higher in the short term than the variable rate (especially when there is a market expectation of a rates rise).
Fixed loan rates are most popular when there is an expectation that interest rates will rise. Checking the Infochoice Fixed Interest Rate Home Loans comparative data reveals that fixed rates are higher over longer time frames, which suggests the market expects a period of rates rises.
Many banks now offer home loans with both fixed and variable portions. This can be a good way to safeguard part of your loan against rate rises but maintain the flexibility of paying the variable portion of your loan off more quickly.
When deciding whether or not to fix your loan it is worth plugging some figures into the Infochoice Home Loan Calculator to get a sense of how different interest rates will affect your repayment amounts.