Mortgage Strategy in 2009

To Fix or Not to Fix

At its recent meeting, the Reserve Bank Board decided to leave the cash rate unchanged. This means variable rates are on hold for a while longer.

One can definitely now say that interest rates have bottomed out and any movement in interest rates going forward will be upwards. The RBA made subtle hints towards this in their media announcement.

We don't believe rates will rise sharply, however as previously communicated we see at least four 25 basis point incremental increases to variable rates over the coming 12 months (i.e. 0.25% each time).

Our best rates

  • Discounted variable 4.66%
  • Basic variable 5.03%
  • Offset variable 5.09%
  • 3 year Fixed 6.99%
  • 5 year Fixed 7.09%

To fix or not to fix

The question on most people's mind at present is whether you should be fixing your variable interest rate to protect yourself from rising interest rates.

To fix or not to fix will depend on your own personal circumstances. There is no right or wrong answer.

Mortgage industry research over the past 30 years reveals that borrowers on a variable rate were 83% better off than borrowers on a fixed rate.

There are many reasons why you would fix your mortgage rate, however speculation is not one of them. This has always been my view (as you know). However it can be a sound strategy depending on your own circumstances (e.g. investment loans).

Below are the main Pro's and Con's of fixing an interest rate, which will hopefully help you with your thinking.

Pro's...

  • Fixed repayments
  • Known cash flow
  • Certainty around household expenses
  • Easier to budget
  • Lower repayments and lower interest cost if interest rates rise
  • You buy yourself an insurance policy against rate rises

Con's...

  • No flexibility as you cannot transact your loan account potentially costing you thousands in extra interest
  • Limited extra repayments (usually $10k max per annum)
  • No redraw until the fixed term is over
  • Higher repayments and higher interest cost (initially) as long term fixed rates are always higher than current variable rates
  • Potentially high exist cost if you want to break the fixed term (e.g. you sell your property sooner than planned)
  • Higher repayments and higher interest cost if rates fall further (unlikely given the above comments)

A key consideration (in my view) is the flexibility issue, and the fact that variable rates are still at an all time low. If you were to fix your rate now you will be paying 7%+ from day 1, compared to 5% (on average) as a current variable rate.

I think the variance between current variable rates and long term fixed rates is too wide at present, meaning the banks are looking to profit from people reacting and fixing rates in a hurry.

We hope the above gives you some food for thought.

Please feel free to contact us to discuss your personal situation in more detail or if you require advice in relation to your mortgage.

Mario Borg, B Bus, ASA, MBA, Dip FS (FP)

m: 0408 398 476
e: mborg@mortgageachievers.com.au



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