Why you shouldn't fix your interest rates

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You can never be exactly sure what is going to happen with interest rates. If there is speculation that interest rates are set to come down, should borrowers ignore low fixed rate offers and keep their mortgage on a variable interest rate?
In recent weeks, the finance industry has gone from predicting several interest rate hikes in the next 12 months, to a potential rate reduction by Christmas.
It’s making more than a few mortgage holders across Australia nervous. Some have responded to ever-changing sentiment by locking in some rate stability, with the appetite for fixed rate home loans reaching its highest level in five months, reports Mortgage Choice.
“Perhaps the constant speculation about interest rate rises in the latter half of 2011 and beyond convinced a higher number of borrowers to simply lock in their rate, rather than feel their stomach churn with each piece of speculation,” says Kristy Sheppard, corporate affairs, Mortgage Choice.
“Over the past month we’ve seen several lenders reduce their fixed rates on home loans. Now, there’s one tenth of a percentage point between the average three-year fixed rate, traditionally the most popular with borrowers, and the average basic variable rate. We haven’t seen that close a comparison in some time.”
What this means is that borrowers can obtain a three-year fixed rate loan right now at the same interest rate as a variable product.
This is great news if you believe that interest rates are headed north – which, up until a few weeks ago, is what most lenders and economists had predicted. If rates decrease as Westpac recently forecast, however, you’ll be stuck paying more for your mortgage than you need to.
Trying to guess what the banks will do with interest rates is just that – a guess – but Smartline Personal Mortgage Advisor Linda Clucas says borrowers can educate themselves to try and make the best, most informed decision for their own situation.
“In order to understand what worries the RBA, you need to know that they have a ‘fight inflation first’ approach, and aim for a target range between 2% and 3%,” she explains.
“There are four important leading indicators that I know the RBA keeps a close eye on to predict future inflation growth; wages growth, low unemployment, high consumer confidence and credit growth.”

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We currently have two of the four: modest wages growth and low unemployment. “On the other hand, we have low consumer confidence and near zero credit growth, hence the holding pattern with rates,” she says.
This means that the Reserve Bank’s decisions over the coming months could go either way – and of course, there’s nothing stopping the banks from lifting their mortgage rates outside of an RBA movement.
At the end of the day, no one can predict with any real certainty where interest rates will go. If you can afford to weather the peaks and troughs it may pay to stick with a variable loan and hope for the best. Otherwise, consider fixing half of your mortgage so that at least part of your monthly mortgage payment is stable.

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