In this article:
Deciding whether to fix your mortgage is usually a trade-off between the stability offered by fixing, or the flexibility and lower interest rates that traditionally come with variable loans.
With the cash rate at a historic low of 0.25%, fixing your mortgage to protect against a potential interest rate rise might seem the obvious choice. But with the financial uncertainty of COVID-19, this once straightforward decision no longer has a direct answer. Here’s what you should consider when deciding whether now is a suitable time to fix.
How long the official cash rate might stay low
If rates are likely to flatline for an extended period, take the time to weigh up your options…
The Reserve Bank of Australia (RBA) has indicated that the official cash rate might stay low for some time to come. At its May meeting, the Governor stated: “The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band.”
While this is not a guarantee against rate increases, it does suggest the RBA is in no rush to lift rates. Therefore, there’s no reason to rush your own decision about whether or not to fix your mortgage. If rates are likely to flatline for an extended period, take the time to weigh up your options, evaluate your financial standing and talk to your mortgage broker before deciding whether to fix.
- Useful reading: Fixed or Variable: Which is the Better Option?
Learn how much you can save through refinancing.
Whether rates will drop
If you’re waiting for the cash rate to drop to zero before you fix, there is a possibility you will be waiting a long time.
If you’re waiting for the cash rate to drop to zero before you fix, there is a possibility you will be waiting a long time. While there is still room to cut the cash rate one more time, the RBA have made it clear that this is very unlikely. However, this doesn’t mean that lenders won’t drop their interest rates on some products. Contact a Yellow Brick Road mortgage broker to find out the most competitive rates and terms for your circumstance. An advantage to working with us is the extensive network of lenders we source our loan products from.
Which option will give you a better rate
When the RBA slashed the cash rate twice in March, the lower rate was expected to be reflected in variable rate mortgages. Instead, many lenders chose to reduce their fixed rate products – turning on its head the usual convention that variable loans offer better interest rates.
It serves as a lesson about the importance of comparison research when choosing between fixed and variable. Always look at a range of home loan products – both fixed and variable – across different lenders. Yellow Brick Road’s mortgage brokers can do this legwork for you, saving you time and ensuring you get the most competitive interest rate deal.
Break fees might not be a big problem
One of the concerns about locking into a fixed rate is the high cost of breaking the terms of the home loan contract if you need out. Traditionally, the break fees for paying off a fixed rate loan early are larger when prevailing interest rates are lower than when the loan was fixed. If we are entering a period of stable interest rates before rates slowly increase, then the risks of large break fees may be mitigated.
Break costs are calculated based on movements in the rates at which banks fund your fixed rate loan – known as Wholesale Market Interest Rates. When interest rates rise rather than fall, lenders can reinvest their funds with the possibility of a better return. If this happens, lenders may not need to impose such high break costs.
Ultimately, it’s essential to be cautious when going into a fixed term. After all, the formula for calculating break fees varies from lender to lender, and no one can predict what will happen in the broader economy. If you know in advance that you will be selling soon or paying off your loan early, steer clear of entering a fixed term contract.
If you decide that fixing is right for you, read the fine print of your contract carefully and have your mortgage broker explain all the fees and costs you may be liable for.
Your Yellow Brick Road mortgage broker can take you through the pros and cons of both fixed, variable and split rate loans. A split loan allows you to divide your mortgage between fixed and variable interest rates, allowing you to maintain a degree of both flexibility and certainty.