Without the benefit of a crystal ball to gaze into, there’s no way of knowing where interest rates will go in the next two years. It’s no wonder then that mortgage holders are confused over whether they should fix their home loan, or stay the course with a more flexible variable product.
You just need to look at the RBA’s track record for the last 24 months to see that interest rate movements have been volatile, to put it mildly.
The Reserve Bank has moved interest rates no less than 12 times since September 2008, with the cash rate plunging from 7% down to 3%, and then back up again to its current level of 4.5%.
|Effective Date||Change in cash rate (%)||New cash rate (%)|
|5 May 2010||+0.25||4.50|
|7 Apr 2010||+0.25||4.25|
|3 Mar 2010||+0.25||4.00|
|2 Dec 2009||+0.25||3.75|
|4 Nov 2009||+0.25||3.50|
|7 Oct 2009||+0.25||3.25|
|8 Apr 2009||-0.25||3.00|
|4 Feb 2009||-1.00||3.25|
|3 Dec 2008||-1.00||4.25|
|5 Nov 2008||-0.75||5.25|
|8 Oct 2008||-1.00||6.00|
|3 Sep 2008||-0.25||7.00|
Of course, banks and lenders have moved interest rates independently of the RBA on several occasions as well, giving borrowers an extra dose of instability.
With the prospect that interest rates will increase at some point over the next 6-18 months, many mortgage holders are questioning whether to fix all or some of their loans now.
“This is always the million-dollar question and the answer ultimately depends on personal financial situations and also personal views on how rates will shift in the medium to long-term future,” says Steven Ramage from Citibank.
“That said, the interest rate’s future curves, although volatile, show that there might be some opportunities at the longer end, so it may be worth having a look at the three to five-year rates on offer.”
AMP Capital Investors’ economist Shane Oliver suggests that borrowers look at a fixed/variable split, explaining that “it’s too late to have 100% fixed” as “the odds still favour higher variable rates”.
Meanwhile, Lisa Montgomery from Resi Mortgage Corporation believes that variable rates are the only way to go in the current economy.
“We wouldn’t advise fixing in this climate unless the borrower has a convincing financial reason to do so,” she says, adding, “A standard variable option always gives the borrowers more scope to adjust their repayments to suit where they’re at.”
While it’s clear that economists and financial experts are equally divided with their opinions and advice, there is one non-financial consideration that all borrowers need to ponder: peace of mind.
Fixed rates eliminate fear and provide you with a level of security and stability that variable rates simply can’t offer. They also save you from experiencing the excruciating countdown to 2.30pm on the first Tuesday of every month, when the RBA announces its latest rate decision. If your mortgage is keeping you up at night, it might be worth fixing at least part of your loan to keep your money anxieties at bay.