In November 2007, 24 per cent of borrowers who established a new home loan fixed their rate for more than 2 years. That's nearly twice the average for the last decade and a half.
Are they doing the right thing?
The "fixed versus variable" question is something I attempt to answer many times each week.
It appears from the data we have seen, that we are in fact very close to the peak of the interest rate cycle. Therefore, we expect fixed rates to reduce towards the end of 2008 or even earlier (both ANZ and CBA have reduced fixed rates in the last few days). It is unlikely that fixing your interest rate now would be advantageous from a long term point of view as your downside risk (i.e. risk of future interest rate increases) is limited to one, perhaps two, interest rate increases in the next 1 to 2 years.
Slightly more than one rate rise of 0.25% is already factored into current fixed rates, so by fixing now, you would be:
• Prepaying the next interest rate rise (as it may not occur until March or even later given the recent stock market volatility, increases in petrol prices, and an increase in standard variable rates by most lenders of 0.10% to 0.20% in January 2008), and
• You will not benefit from the projected variable interest rate reductions in 2009/10 and onwards.
What do the top economists think?
Whilst it is very difficult to predict the future (even for so-called experts), let’s look at what the major banks have forecast in relation to the RBA cash rate (which is currently 6.75%) for each quarter of 2008.
Source: Bank websites and economic reports. n/a = not available
BIS Shrapnel has forecast that interest rates will be relatively steady during 2008 and that the RBA will begin cutting rates over 2009/10 (Source: PMI Property Update released Oct 2007). This is consistent with the banks’ forecasts shown above.
Non financial and personal considerations
Non-financial considerations can be more important than the financial ones at times. It may be appropriate to consider other factors such as:
• Some people feel emotionally comfortable if their financial commitments are ‘locked in’. These people may therefore prefer the security that a fixed rate provides.
• Most fixed rate products (unlike variable products) limit the amount of extra repayments that can be made which might make these products inappropriate for your individual circumstances.
There are many personal considerations to take into account so it may not be appropriate to be influenced solely by the abovementioned financial and economic considerations.
Perhaps you should consider a split loan (a portion fixed and a portion variable). For further information please contact me @ IPS Home Loans on (02) 4227 5511.
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