This is the million-dollar question (or $621,500 if you live in Sydney)!!
As you may have seen on many news outlets and our regular email updates, rates have dropped again. Whilst this drop was anticipated, it appears so far as though the banks are not willing to pass this on.
Whilst this is disappointing and frustrating to say the least, they have announced some very competitive fixed rates, namely for their 4-year terms. So far we’ve seen NAB (1.98% 4 years), CBA (1.99% 4 years), Citibank (1.99% 2 years unadvertised) all breach 2% with their rates, whilst the best variable rates are still in the low to mid 2%’s (higher than 2.5% for the majors).
If we’ve ever discussed fixed rates, you most likely would have heard me use the caveat “I’ve never met anyone who has chosen a fixed rate and ended up better off at the end of the term” or something along those lines. Interestingly, I still remember a Citibank special many years ago at 4.99% and the mortgage industry went wild (fortunately, fixed rates weren’t as popular back then!).
Having said this, the Reserve Bank has stated that moving to negative interest rates is “extraordinarily unlikely” – Reserve Bank Says Rate Cuts On The Table But Move To Negative Rate Unlikely, so given we’re now at .1%, how much lower can rates actually go?
So this begs the question – To fix, or not to fix?
The fact is, fixing your rate still comes with the same risks. The importance of this is that you mitigate these risks as much as you possibly can. These risks include (but are not limited to):
– Limited repayments and no offset – some lenders only allow up to $5k or $10k per annum in extra repayments and don’t allow you to redraw. You can mitigate this by having part of your loan variable (the variable amount would match the amount you could make in extra repayments over the fixed term) and potentially attach an offset account.
– Variable rates reducing – you could pick a fixed rate and watch as other rates fall around you! There isn’t really a mitigant for this other than to balance this against the benefits of fixing!
– Break costs when selling or refinancing – banks will charge a non-predetermined amount if you exit the loan prior to the end of the fixed term. The key is to put as much planning and researching into your plans to ensure this is unlikely. e.g. If you need to refinance to use equity, or you are likely to sell within a short period of time, it might be best not to fix.
There are some potential benefits to fixing though. You have the certainty of knowing exactly what your repayments are for a period of time and you don’t need to worry about rates increasing during the fixed term. Rates are also lower for fixed rates, so this is worth considering if you’re keeping your costs low.
As with any financial decision, careful planning and thought is important. If you’re thinking about fixing and would like to discuss, please feel free to book in a time here – Calendly | Joel Wyld – and we can discuss in more detail.
Please note – this does not constitute advice and is general in nature.
