With the prospect of an interest rate rise on the horizon, we ask the question: Is it time to fix your mortgage interest rate or continue to enjoy variable rate savings? Our managing director Chris Jonson shares his thoughts and explains why it’s important to choose loan products that match your specific needs.
Interest rate signaling from the banks
Back in November 2021, you could get an owner-occupier, principal-and-interest home loan fixed at 1.99 percent for four years. Now it’s March 2022 and four-year fixed rates are starting at 3.24 percent. It tells us that the banks are forecasting a potential rate rise.
The question is should you lock in a fixed rate now or continue to enjoy variable rate savings?
Nobody has a crystal ball
The truth is that trying to predict interest rates is like trying to read tea leaves–everybody sees something different.
What we do know is that interest rates will eventually go up. By how much and when, nobody is certain.
Most experts agree that the Reserve Bank of Australia (RBA) will need to take a very measured approach.
If the RBA goes too fast or too far, it could trigger an increase in mortgage stress. This makes me feel that sharp interest rate rises are somewhat unlikely.
Let the RBA worry about the economy - we focus on you
But all of that of course is the big economic picture. Your focus should be: how is this going to impact my mortgage and, in turn, my finances. Should I fix? Should I split? When? What are the potential benefits and risks?
We can run those numbers for you and model, very specifically, what different loan scenarios look like. We can also outline the comparable benefits and risks of each of these products.
Variable and fixed rate loans are different products
Variable rate loans usually come with interest-saving features, such as an offset or redraw facility. Whereas very few fixed rate loans allow you to make extra payments, or they have strict limits.
This is why we often recommend splitting a loan into part fixed and part variable. It means you can make extra payments on the variable component to reduce your interest exposure and still have access to surplus cash, while also enjoying interest rate certainty on the fixed portion.
There are pros and cons to all lending products, which is why spreading your options and risk over multiple products can be beneficial. Again, what's right for you will come down to your personal circumstances and goals.
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