Is it time to fix your interest rate?

This week: Is it time to fix your interest rate?

In this video I talk about why so many people are fixing their interest rate, why that is and whether it's something you might want to think about.

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Transcript

Hey, and welcome to Mel's Money Musings. 

And today I'm asking the question: is it time to lock in the interest rate to a fixed rate on your home loan? 

Now, if you've been playing along with me for a few weeks back in halfway through October, I flagged that I thought we were gonna start to see more and more commentary around interest rates rising, and guess what? We've seen more and more commentary around interest rates rising. 

But last Friday, there was an event that happened where we're starting to see real changes now to interest rates. And certainly in Australia, the event that happened last Friday is that the bond rate increased. Now, what we've seen as a result is that market pricing has shifted when they've expected the interest rate increases now to happen. So they've moved from thinking that interest rates would happen in November 2022 to priced those interest rates happening in May 2022. 

Now, what we've also seen as a result of those bond rates rising is that all the major banks have now increased their three year fixed interest rate on their mortgages. And if we go to something like RateCity which compares interest rates, 19 lenders have now increased a three year fixed interest rate.  

So that begs the question: have we left our run too late if we are thinking about locking in an interest rate?  

Now, if we look at what consumers are doing at the moment. So at the beginning of 2020, about 20% of people had a fixed interest rate. Now we're looking at about 35% of people locking in their interest rate. And why people lock their interest rate in is that 'sleep at night' factor. Or if they're concerned that interest rates will go up and they wanna lock it in for certainty in that low alone. 

So that begs the question. If interest rates are increasing for fixed loans, is it still worth locking in an interest rate?  

Well, what we wanna do is look at what variable rates are doing. And certainly at the moment, if I was to look, if I was to go to something rate like RateCity and look at what some usual variable interest rates are, we're looking at between say 2.2% and 2.72% for your fairly average variable rate. Yet when I compare that to a three year fixed interest rate, we're looking at 2.08% to 2.39%. So that three year fixed rate is lower in many cases than a variable rate. And certainly there are even some lower honeymoon rates where I can get something with even a one in front of it, if I'm willing to lock in for just 12 months.  

So what do you do if even with these bond rates increasing, if fixed rates are lower than variable rates, should you just lock in your mortgage to a fixed rate? 

You know what I'm gonna say? The answer is? It depends.  

So the Reserve Bank had come have come out and say, Governor came out and said last year, they didn't expect to increase interest rates to 2024. Lots of analyst are now saying they expect that to happen earlier. Certainly the market has priced it in and happening in May 22. I don't think it's gonna happen next month. I think the Reserve Bank will wait to see what will happen with Christmas spending and spring house price movements. And we'll know in Feb - March as to whether we'll be looking at an interest rate rise in the first half. But if fixed rates are less than variable rates, and if we don't believe that interest rates are gonna drop any lower, which I don't believe they are, then should we take advantage of these lower fixed rates? 

If it was me, what you may wanna do is hedge your bets.  

So the problem with fixed rates is once we lock our loan in, we have break fees if we decide to change that loan. Sometimes we get penalized if we wanna pay more off that loan.  

So what you may wanna consider is a half and half, and I call this hedging your bets. So half of your loan is a fixed rate, which is lower at the moment than a variable rate. So really there's not a lot of risk there. And half of your rate is variable where you may have more of a 'bells and whistle' package with an offset account and the ability to pay more off the loan if you choose.  

Certainly what I would be doing is if you haven't asked for an interest rate decrease in the last 12 months, I would be going and asking for that. 

So if you listen to me today and go, right, I think I wanna hedge my bets. I'm gonna ask the bank to split my loan half fixed, half variable. I would also be asking for a reduction in my variable loan interest rate, because especially at the moment, if you're a good risk, if you've been paying off your loan, we've seen 0.5% taken off loan interest rates really from you simply asking the question. 

So that's it all laid out for you. As to what you should do, only you know that. But hopefully for me explaining why we're starting to see, um, more talk of interest rate rises, why we're starting to see fixed rate rises, and yet why we're seeing fixed rate still under variable rate percentage of is maybe this will actually trigger that. Hmm. Is it time for me to act because the truth is it's not too late, you haven't missed the boat, but you're going to have to make a decision soon I suspect as to should fixing in part of your mortgage be for you. 

Hope you've enjoyed this Money Musing. If you know that you need more help with this, if you know that you need to understand, should I even be paying off your mortgage? Which, uh, just side note - no, I think that most people shouldn't just be concentrating on paying off their mortgage and that's it.  

Make sure you sign up to the waitlist for the Financial Adulting Plan. And if you know this would help someone else just flick it to them so that they understand more about financial literacy too. And then you've got more stuff to talk about. Right? All right. Have a great weekend.