Hedging your bets on interest rates

PICKING the right time to fix your mortgage is difficult. Sometimes it can be a case of taking advantage of what seems like a great deal at the time. At others it could be hedging your bets against things going wrong. Once you have fixed, things can go either way.

I can recall discussions with people that were happy to fix at 5 per cent, who later lamented that fact when a 3 per cent rate became a reality. Go back long enough and there are those that might have locked in 12 per cent interest rates (saving themselves from the 18 per cent heights) but then missing the benefit of later drops.

Anyone that locked themselves in between late 2020 and earlier this year though, is likely feeling pretty good about that decision after this week, and the RBA’s landmark decision to push through a fifth consecutive rate rise, the fourth at a half percentage point – making for a

2.25 per cent lift so far in 2022.

As tempting as it might be to kick yourself over the decision to go variable over fixed, it’s worth keeping in mind that a fixed interest rate isn’t for everyone or every set of circumstances.

Even in an environment where interest rates are likely to rise, a fixed rate can lack the flexibility that some people need in their lending which precludes it being their best choice. One scenario where it might not suit is where you are expecting a lump sum of money to come through, that you would plan to put against your mortgage – say for example the sale of another property after settlement on your new purchase. With fixed mortgages you can be limited from making additional (or at least large) repayments, meaning you continue paying interest across a larger loan than might otherwise have been the case.

Another scenario might be where circumstances change and you need to sell (or refinance) a property quicker than anticipated – again, given the restrictions of the loan terms this might result in hefty penalties (break fees) that can be in the thousands of dollars. I’ve been caught on this once or twice.

With varying views on the next 12 months, and whether rates will come back down as inflation calms down, it’s still a tough question going forward. As always, consider your personal circumstances, get the right advice (from a finance professional) and do your homework before making the big decisions.

Tom Quaid is the REIQ Zone Chair for Cairns