fixed interestThis is a question I get asked nearly every day.  And with outbreak of a mortgage war between the big banks on their fixed-rate loans – it’s a question on every home owner’s lips.

Over the last two decades variable mortgage rates have averaged around 7.5 per cent, so the current rates which have dropped to as low as 4.99% mean good news for borrowers.

At present the fixed rates on offer are substantially below the bank’s advertised standard variable rates of around 5.9 percent (of course, most borrowers can negotiate a discount to that headline rate).

Why are Interest Rates so Low?

It seems that banks are essentially taking a bet that interest rates won’t rise from their current record lows for the next few years. So the reason for this sudden discounting of rates is due to a recent decrease in their funding costs, as international investors bet on lower interest rates for longer.

Basically, even if rates do rise and they do wear some losses in the fixed funding market, they can afford it.  Look at the enormous profits they’re making.  They may decide it’s worthwhile to take a few losses to attract  some new customers.

Should You Switch?

Before whipping out your pen and signing on the dotted line for a cheaper fixed rate mortgage, make sure you check out the “strings”.

  • What are the break costs if you want to exit the mortgage before the end of the fixed term period?
  • Are there any restrictions on making additional repayments, if you should unexpectedly come into some money? You never know – paying off your loan faster may result in you paying less interest than the cheaper fixed rate.

Overseas long term fixed rate loans are the norm. In Australia, where historically borrowers have valued the ability to pay off their loans faster,  less than one in five Aussies opt to fix their mortgage.

Are There Any Alternatives?

Before you opt to fix, why not try haggling on a variable rate loan? It really is a buyer’s market at the moment, with borrowers being able to get as much as 1 or 1.5 percentage points off the headline standard variable rate.  Ring your bank and ask.  You’ve got nothing to lose, and you may be surprised at what they might offer if you threaten to leave.

At the end of the day, the decision to go fixed or variable is a bit of a gamble on where you think interest rates are going to go.

Switching to a fixed rate loan will protect you against interest rate rises, but it could also deny you the benefit of any interest rate cuts.

There’s always lots of speculation about where rates will go – and the more likely possibility  is that they will remain at their current lows for a long period of time. When it comes to global interest rates “lower for longer” is the new mantra.

These are, after all, unusual times we live in. America is still printing money to pump its economy and many central banks have their interest rates at close to zero percent.

So whether you go fixed or variable, debt is cheap and likely to remain that way for some time.

 If you’d like some help with your mortgage, give us a call.  We’re really into all this stuff!

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