Should you fix your mortgage rate?

With historically low rates, is now the time to lock in your low interest rate?

With rates at historic lows, one should put consideration into fixing their home loan mortgage rate. The best rate mortgage deals tend to be on offer by most banks at present.

There are no signs in the future that indicate a rate rise so if you are wondering whether to fix your mortgage rate, now is the time to consider action.

The Background:

Australia’s cash rate is one of many factors that banks use to set the interest rates on loans and deposits. Cuts to the cash rate often leads to lower interest rates, meaning borrowers pay less while depositors earn less. And when the cash rate increases, higher interest rates can make loans cost more and deposited savings earn more interest.

In a recent article published by the Reserve Bank of Australia regarding the decision to keep the cash rate on hold, the RBA governor, Dr Philip Lowe, had this to say:

"The Board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus. The comprehensive policy package announced last month will also support the expected recovery. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band."

According to the RBA, there are no plans (for now) to cut the national cash rate to zero, or to move into negative interest rates as seen elsewhere around the world. A negative interest rate could lead to unusual situations where depositors pay money to the banks holding their savings, while borrowers could actually earn money on their loans. A banking environment such as this has never been seen before in Australia’s history.

The Outlook:

Borrowers are faced with an interesting dilemma.

Do you take up the competitive rates on offer by converting the loan from a variable rate to a fixed loan rate. Or do you leave it as is and take the chance and wait patiently for the banks to offer lower rates than currently on offer.

Two sides to this coin flip.

Side A - Some borrowers believe locking in a fixed rate gives a feeling of confidence knowing for definite what they will be faced with regard to their repayments over the fixed rate period. This position will safe guard them from any potential increases in interest rates during the term of the loan.

Side B - One important factor overlooked, is a variable rate loan will provide choice and flexibility. That being the ability to make additional repayments (in order to pay the loan off sooner) as well as no break lease or early pay out penalties. Moreover if personal plans change the loan facility is much easier to discharge giving greater options to the investment.

Speaking with a mortgage professional will allow you to understand what your options are, as when it comes to restructuring your loan and your mortgage repayments it will be based on your personal financial goals.