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Money → give → money
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you → read → inbox
If you’re a mortgage holder, you’re not sitting − hopefully just metaphorically − in a very comfortable place this weekend.
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you → ’re → place
All of our biggest lenders predict that on Tuesday there will be another interest rate increase.
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All → predict → Tuesday
And it may well be backed up by a second one on Melbourne Cup Day.
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it → back → Day
That would take it to five for the year, when several months ago talk had turned comprehensively to cuts.
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talk → take → cuts
It would also mean a cash rate of 4.85 per cent … the highest since 2008.
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It → mean → 2008
So, today, we are discussing whether you should fix your home loan interest rate.
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you → discuss → rate
What’s the problem?
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problem → ’ → ?
On a now fairly typical $700,000 loan, each rate rise adds more than $100 a month to repayments.
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rise → add → repayments
That’s of course on top of an escalation in the price of pretty much everything else and, particularly, petrol prices again.
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That → ’ → everything
That’s the issue at the centre of a “Hail Mary” mortgage fix.
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That → ’ → fix
And it’s about this time, crunch time for interest rates, that some borrowers’ thoughts finally turn to it.
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thoughts → ’ → it
Many of us are stretched and stressed already financially, and fixing seems a good way, albeit a crisis way, of containing that.
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fixing → stretch → that
Indeed, the latest intel from Finder is that nearly a third of mortgage holders (29 per cent) have now made the move to fully fix.
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third → make → move
But fixing at this late stage may not be the best idea.
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fixing → fix → stage
The fixing dilemma, and what you can do about it
I asked Canstar to analyse the recent rate movements and guess what?
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I → do → what
Seventeen lenders have increased one or more of their fixed rates this month so far.
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lenders → increase → rates
That means that the economists at those institutions expect the Reserve to hike.
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Reserve → mean → institutions
But it also means that if you become uncomfortable enough to fix your rate, you will pay up there for whatever contract duration you choose.
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you → mean → duration
Note, too, that you may well pay extra at the outset.
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you → note → outset
The Canstar analysis also reveals that while the average two-year fixed rate is 6.36 per cent (a lot are higher), the average variable rate is only 6.02 per cent.
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rate → reveal → ?
But we could be there by early November, so you also need to consider the negative aspects of fixed rates ... aspects that many borrowers don’t consider enough.
The surprise drawbacks of fixed rates
Fixed rate loans, leaving aside that they let you lock in a rate, have two little-known drawbacks.
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you → need → drawbacks
Firstly, you are not usually able to pay extra once you fix your home loan.
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you → pay → loan
This means that not only have you committed to that interest rate, you have committed to not saving any interest by making additional mortgage repayments.
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you → mean → repayments
Now, if you’ve been playing along at home with my columns for a while, you will know that you shouldn’t pay extra directly into a home loan anyway … any extra money should go instead into offset accounts alongside it.
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money → play → it
An offset account lets you maintain full flexibility over, and full access to, your money.
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you → let → flexibility
By contrast, relying on your lender allowing you to redraw over-payments, especially if you’ve found yourself in financial trouble, is risky.
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yourself → rely → trouble
Besides, an offset account should give you the same mathematical interest advantage.
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account → give → advantage
Unless it is an offset account attached to a fixed loan, that is … fixed rate drawback number two.
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that → attach → loan
It is very common for offset accounts attached to fixed-rate loans to either offset interest at only a portion of the interest rate or on a less-than dollar-for-dollar basis.
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accounts → attach → basis
You may, for example, only make half the interest savings you otherwise would on a variable rate.
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you → make → rate
For all the reasons above, I have two strict rules of fixing:
1. Only ever fix half your mortgage – Finder’s survey reveals that 7 per cent of Aussies have cannily only committed to this extent.
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cent → have → extent
Interest rate expectations can turn on the head of a pin − as we’ve witnessed this year − and you don’t want to be more exposed to an inflexible rate than that.
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you → turn → that
But when rises are imminent is probably, sadly, the worst time to fix.
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are → fix → ?
A better way to save than fixing
While 6.02 per cent might be an average variable interest rate right now, many Australians are paying 6.8 per cent or even higher.
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Australians → save → cent
Indeed, if they fixed, they might even slash their monthly repayments.
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they → fix → repayments
But we’ve already talked about the other reasons fixing may not be a good idea.
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fixing → talk → reasons
A better alternative, at this stage of the game, is probably to chase the best variable deal … at least for half your mortgage.
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alternative → chase → mortgage
This is currently hovering at about 5.8 per cent.
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This → hover → cent
…and 12 more, not listed.
The Aporia
