Many of our clients ask us whether – and when – they should fix the interest rate on their loan, or on a portion of their loan (split rate).
The answer to these questions will always depend on your individual circumstances; however, getting the timing right is also important. Typically, fixed rates are at their lowest before any substantial discussion emerges of a pending rate rise.
While forecasting is an unreliable science, some lenders (such as NAB, AMP and Westpac) are suggesting we could see two rate cuts this year. The ASX futures market has priced in a full 25 basis-point cut by September this year. The Commonwealth Bank has estimated we won’t see a rate hike until late next 2020.
While you will want to make the most of any rate cuts we may experience, remember that banks aren’t obliged to pass on these savings. UBS analyst Jonathan Mott believes lenders will only pass on around half of any RBA cuts, due to funding issues from the ongoing low-rate environment.
In addition, rates can be fixed for one, two, three, five or even 10 years, so missing out on a theoretical one or two rate cuts should be weighed up against what you could save down the track. Fixing is also about locking in a rate you know you can afford.
As can be seen from the graph below, fixed rates have generally been coming down, while variable rates have largely been climbing over the past 12 months.
So, how to decide?
Staying on a variable rate may be the right option if:
– you think rates will stay the same or decrease in future
– you can afford repayment increases if interest rates increase
– you want the flexibility to make extra repayments, or to close or change your loan in future
A fixed rate may be the right option if:
– you think rates will increase in future
– you prefer the certainty of fixed repayments so you can budget more easily
– you don’t expect your lending needs to change during the term of the loan
– you don’t need extra features, such as redraw or the ability to make additional repayments
You can always split your loan if you want to mitigate the risk of increasing rates and still keep some flexibility.
Finally, give me a call and I can assess your specific circumstances to see if fixing all or some of your loan is right for you.