Should I Fix My Home Loan?
Earlier this week there was an article in the “Australian Newspaper” speculating that the banks may increase their home loan rates outside of the normal RBA rate cycle, with the aim of increasing their profits. “Banks tipped to hike rates again - Michael Bennet 27/01/2016”
The article speculated that the banks may hike rates by 10-15 basis points (0.10% - 0.15%).
Whilst none of the banks have confirmed rate rises (at the time of writing), the article raises the question of what direction interest rates are going and whether it is a good time to fix your home loan rate?
Unfortunately, there is no ‘one size fits all’ answer to this question and there are a range of factors to consider. I’ll outline some of the considerations here:
Are interest rates at their lowest point?
Many borrowers that are considering fixing their home loan rate try to guess the bottom of the interest rate cycle before locking their rate. Whilst we all like to ‘get the best deal’, this strategy rarely works. Over the years, I have rarely seen anyone accurately pick the bottom of the rate cycle accurately. In fact I’ve seen money market experts get it totally wrong. In one example, I saw a professional fix their rate based on a series of economic announcements - some months later these announcements were ‘revised’ and the borrower ended up paying a high fixed rate.
The message here is that it is too hard to pick the bottom of the market - even the experts don't get it right all the time.
If interest rates rise, how much would you be affected?
Over time, the size of the average home loan has increased (in line with the increase in home prices). Whilst the home loan sizes have increased, incomes have not increased at the same rate. A 2013 report from the ABS “Trends in Household Debt” showed that the percentage of debt compared to annual income rose from approximately 1.4x income in 2001 to 1.8x income in 2013. Whilst this report is a few years old, there is no evidence to say that this ratio has changed dramatically.
As a result of larger home loans (in real terms and as a percentage of income), any interest rate increase has a greater impact on repayments as a percentage of income. It is worthwhile calculating what level of interest rate increase you could comfortably bear, this will give an insight into whether a fixed rate is a good idea.
Are your circumstances likely to change in the foreseeable future?
Depending on your stage of life, household income and expenses can change over time.
Income can be affected by changing family circumstances such as maternity, a change in work circumstances such as a change from full-time to part-time work (or vice versa), career change, or redundancy/ retrenchment.
Expenses change depending on the age of children, whether they are in a private or public school etc. Eventually, family expenses decrease (hopefully) as children ‘leave the nest’.
Any decision to fix a home loan should factor in any known (or possible) changes to circumstances.
How long are you intending to keep your current property?
Regardless of whether your loan is for your owner occupied, or an investment property, it is worthwhile to consider how long you intend to keep that property. If the property is to sold in the short-term, a variable rate may be more suitable. Whilst many of the ‘exit-costs’ for home loans have been removed, break-costs for fixed rate loans can still be expensive.
Whilst some lenders offer the flexibility to transfer a fixed rate loan from one house to another, not all do, so you should consider whether it is likely that you will need to ‘break’ the loan early.
There’s too much to think about, I just can’t make up my mind
As I have previously outlined, it’s almost impossible to precisely pick the interest rate market, this can sometimes cause ‘decision paralysis’ and by the time that it is obvious that the rate should be fixed, the banks have already increased the fixed rates (often fixed rates are changed before variable rates).
This means that by the time a decision is made, the fixed rate may be greater than the variable rate.
One option is to have an ‘each way bet’, leave some of your loan variable and fix some.
Summary and Conclusion:
Clearly there are a range of considerations before fixing your home loan. The discussion in this article is general in nature and at all times, the decision to fix your rate, or not should consider your specific circumstances now and in the future.
Proteger Consulting are Finance Experts, specialising in strategies to Grow and Protect your Financial Position. We offer a free consultation to help review your personal debt position including the decision to fix your loan or remain variable.