To fix or not to fix – managing your rate
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To fix or not to fix- It sure is the question – and the one we are currently being asked most of all!
We are just coming out of an unprecedented period of very low fixed rates, so low that many people who had previously referred to money being cheap at anything under 4%, are now concerned about rate talk of between 3 and 4% again.
In some respects, everything is relative, however rising rates even to levels around 4% will have an impact on the budgets of existing mortgage holders and home buyers who took themselves to their borrowing capacity to get into their home. It is worth noting though, that those who secured a low interest rate over the last 1 to 2 years, would have been assessed with a buffer of 2.5% to 3% to determine affordability – so servicing was assessed as if you were paying a rate of say between 5 and 6%.
It is always difficult to speculate on what rates might do, and in making a decision on whether to fix now or leave your loan on a variable rate. There are so many external impacts that can have a bearing on the cost and supply of money which individually, and in combination can send movements in any direction – overseas markets, bond rates, government policy, elections – at home or overseas, pandemics, natural disasters, international conflicts, just to name a few. It would be fair to say that betting on where interest rates will get to is a bit of a gamble.
In our view, the most important considerations when deciding how to manage your finances are the potential impacts on your own circumstances.
You should focus on how you can manage the way rate movements can affect you, rather than speculate on the external influences that can affect rates – you can’t control those. For example, understanding the impact that say a 1% increase in your home loan rate would have on your budget might help you decide whether to lock in a rate you know you can manage for the next few years. Alternatively you may choose to stay at a lower variable rate for now, however make payments as if you were paying a higher rate to create a buffer. This can help to protect you, if and when your rate increases.
When seeking protection from increases with a fixed rate, it is also important to remember that protection will only last the period you fix for. When that expires you will be at the mercy of whatever fixed or variable rates are available at the time. It can also be useful to calculate what you are giving up in the short term by fixing at a higher rate than a current variable rate. For example, you may choose to fix a rate for two years which is 0.75% above an available variable rate. If the variable rate was to rise by 0.25% six times over the 2 years, it could end up at 0.75% higher than your fixed rate, however your actual interest cost over that period would essentially be the same by the time the fixed period expires.
Our “loan repayment calculators” can help with these calculations: Click here to access.
When being asked to guide clients on their options, we don’t offer advice on where we think rates will get to. We assist our clients to understand the impacts potential movements would have on them, and provide some scenarios to show them how they can manage those to suit their circumstances and provide them comfort over the next few years.
Anthony Landahl | Managing Director Equilibria Finance
This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.
Equilibria Finance is a mortgage broking practice specialising in delivering residential and commercial mortgage and business and asset finance solutions to the clients of financial advice and accounting practices.
