If it aint broke don’t fix it

Mercury (Hobart) - Property - - Front Page - AN­THONY KEANE Money,

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.

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