Question

My bank’s offering me a lower fixed rate than my current variable rate, should I fix my rate?

Answer

As interest rates are determined by a market, fixed rates are currently looking more attractive in comparison to variable rates. This is because the market expects interest rates to be dropped and as such, this is reflected in fixed rates. So if fixed rates are lower than variable rates now this is because variable rates are expected to be lower than the initial fixed rate at some point over the term of the fixed rate. Here’s a graph of where the market expects interest rates to be. This shows that the market expects interest rates to drop .25% by September and believe there’s a good chance of another cut thereafter.

So what is the market and why is it important? The market is where participants buy & sell securities to express their view and as such can be seen as the average of all of the expert’s opinions and these experts have a financial interest and putting their money where their mouth is. As such it’s extremely hard, if not impossible, to outguess the market.

So if I don’t have a crystal ball why would I fix my rate?

Like most things, there are pros and cons.

Pros:

  • Certainty of interest rate and repayments – this could be particularly beneficial if your cash flow is tight over a period e.g. one member of a couple on maternity leave.
  • There is the potential you could be better off depending where interest rates go.

Cons:

  • You lose flexibility as there likely will be restrictions on making additional repayments or paying the loan down early, offset account restrictions and refinancing restrictions as there likely are break costs if you don’t hold the loan for the term of the fixed period.
  • There is the potential you could be worse off depending where interest rates go.

It’s also possible to hedge your bets and have the best of both worlds by having one portion of your loan fixed and another portion variable.

Lastly, fixed rates bring in another complexity and I find options in this space vary a lot more than variable options so speaking to an expert like a mortgage broker who assesses the options available to you may add significant value.

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