Should I Fix My Home Loan?
The answer is YES………..or it could be NO. Actually, the correct answer is still MAYBE.
The Reserve Bank reduced the official cash rate yesterday by 0.25% to a record low of 1.50%. Announcements such as this inevitably make us ask whether now is a good time to fix our home loans.
Following the rate reduction, we’ve seen the banks start to make their rate announcements. Most of the banks have decided to pass on some of the rate reduction. If you follow the announcements carefully, you will see that the rate reductions are actually for their variable rate loans, not their fixed rates.
Without wanting to get too technical, we expected the rate reductions would be for their variable rates. Banks get their money from two sources; deposits (our money which sits in our day to day accounts) and also from the money market. The money market has long factored in low interest rates, so the Fixed Rates have actually been going down before the current interest rate reduction. This means that (from an interest rate perspective) it has been a good time to fix a home loan for quite some time.
Are the current Fixed Rates going to go lower?
There is not a definite answer to this question. On Monday, economists were roughly divided 50/50 as to whether they thought interest rates would be reduced. After the rate reduction, economists were still divided approximately 50/50 as to whether there will be a further rate reduction. So the moral of the story is that no one really knows. For what it’s worth, our view is that the Reserve Bank will not be in a hurry to reduce rates again, they will wait to see what effect yesterdays rate rise actually has.
So what should I do?
Our answer to that question has not changed. If you have not reviewed your home loan for some time, you need to do it. There was an article in this mornings “Australian” ((3 August 2016) which mentioned that of the four major banks, CBA has the lowest advertised standard variable rate of 5.22%. Believe me, you do not need to be paying that much.
Depending on your circumstances, you can get a Fixed Rate on your home loan of less than 4%. This is an exceptionally low rate and you should seriously consider it.
Here’s a sample of the questions that we would ask you if you wanted our guidance:
If interest rates increase, will it impact your lifestyle?
How long are you intending to keep the property?
What other debts do you have – and what rates are you paying on those debts?
Should you be looking at paying off any high interest rate debts first?
Do you have other priorities with my surplus income (renovations/ holidays?)?
Do you need flexible repayments (perhaps to pay the loan off quickly)?
Do you require an interest offset?
Are you anticipating any changes to your income and expenses?
In summary, we get asked whether now is the best time to fix a home loan all the time. When we are asked the question, we sit down and take the time to understand your circumstances and your priorities. When we’ve had this discussion, the correct answer is usually pretty obvious.
Rob Haynes is a Director of Proteger Consulting: Financial Solutions to Grow and Protect your World.