We recently looked at the effect of cumulative interest rate rises on the repayments for an ‘average’ home loan. The increased repayments were staggering. If you missed the article, a link to it is here:
Not surprisingly, we often get asked whether to select a fixed rate, or a variable rate and whether now is a good time to fix.
Our answer to this question is pretty much the same every time…… it depends on your circumstances and whether you would be at risk, if rates were to rise.
The first point is that you should not fix your rate to try and ‘outsmart the market’. Rates can move up or down quickly and the circumstances that influence interest rates can also change quite quickly. We’ve seen this as we went into the Covid era and again as we’ve come out the other side.
If we were to line up 20 economists and ask about the future direction of interest rates, not all will agree, and some of their views would likely be totally opposite. The Reserve Bank tried forecasting rates and even they were proven to spectacularly wrong. We mention this because if the ‘experts’ can’t get it right, what chance do ‘normal people’ have?
The main reason that you would consider fixing your rate is if you think that there is a risk that interest rates will rise and if you think that the rate rise would cause you budget stress, you would consider fixing all or some of your interest rate. The fixed rate provides you with insulation against future rate rises, because your repayments are stay the same for the fixed rate term. This means that if you select a three-year fixed rate, your repayments do not vary for this time. This provides you with budget certainty.
Conversely, if you are comfortable that you can absorb any future rate rises and you think that rates will naturally move up and down over time, you might elect to remain with a variable rate.
Next time, we’ll have a closer look at the positives and negatives of fixed vs variable rates and your rate fixing options.
