If it aint broke don’t fix it
FIXED interest rates are falling on mortgages, creating a potentially tasty carrot for borrowers to bite.
While the Reserve Bank of Australia has been sitting on its hands over official rate cuts, key lenders including the Commonwealth Bank, MEBank andCUAhave dropped fixed rates below 6 per cent in the past couple of weeks. CBAsays some of its fixed rates are at their lowest level in nine years.
While these rate cuts can be seen as great news for borrowers, there is perhaps a more sobering message behind them: that the bank boffins whoset interest rates don’t expect to see big improvements in the economy any time soon.
They’re in the business of making money so they’re not going to deliberately try to lose it by offering low rates that they can’t sustain.
Whenyou can get a five-year fixed rate that’s about 0.7 percentage points below the banks’ current standard variable rate, it suggests that the experts think there’s little chance of
serious rate rises in the coming years.
Perhaps it’s our love of the punt, but Aussies usually avoid fixed rate mortgages.
These loans are great if you need certainty in your repayments and are certain you won’t be moving or selling your investment soon, but research has shown that historically the best financial benefits have come from riding the variable rate rollercoaster.
Trying to time the fixed rate mortgage market is dangerous to your financial health. Back in 2008 manylocked in fixed rates above 8 per cent just before the Reserve Bank savagely cut the cash rate in response to the global financial crisis. People whotried to swap back to variable rate loans faced break costs ofmany thousands of dollars. Some are still locked in.
It’s unlikely that wewill see more hefty rate cuts in the months ahead – our rates are alreadymuchlower than 2008 – but you can’t rule it out. Official interest rates inmany countries are near zero per cent, which makes our 3.5 per cent look pretty fat.
Mortgage experts often suggest part-fixing a loan, to provide the best of both worlds, but this can come unstuck if you have to sell unexpectedly and break the loan.
Fixing can be good insurance for long-term investors or homebuyers whoare worried about being able to afford repayments in rates rise quickly again. For others, first try bargaining for a better variable rate from your financial institution.