The decision to fix your interest rates is always perplexing. Australia’s recent rise in interest rates has moved it above most other markets in the world. Ironically this is the reward for a stable and steady economy that fared amongst the best during the recent Global Financial Crisis.
It does highlight the need to review your finances regularly to ensure that you have the lowest cost option.
With the Reserve Bank of Australia’s latest rise in November 2010, the base lending rate in Australia is now 4.75%pa and the standard lending rate to approximately 7.8%pa – inclusive of the banks’ margins. Surprisingly, this is still on the lower end of historic averages.
It is possible to fix your interest rate over a specified period – usually for up to five years. This means any further increases would not affect you and is a useful option if:
You want the certainty of knowing your interest costs – regardless of changes over a desired period, or
You believe rates will rise even further and want to take advantage of the opportunity to “save” money – as your fixed rate will remain unchanged.
Certainty has its own value. Most people are not so concerned about the saving; they just prefer to have a set expense. But you’re still taking a chance, albeit on a wider platform. The current three-year fixed rate is 7.09%pa (as at November 2010) – a considerable saving on the standard variable rate.
Alternatively, most banks will offer substantial discounts to valued customers. After allowing for the discounts, a typical Australian dollar loan should be nearer to 6.97%pa, and at this rate, the gap is not so wide between the fixed and variable, so it is important to ensure you are getting the best rate from your bank.
If you decide to fix your interest rate you’re hoping rates will continue to rise, or stay the same – rather than go down. If rates reduce, fixing your terms could cost you more in the long run – as you’re locked into a potentially higher rate. And cancelling a fixed-rate agreement comes at a risk of incurring early repayment penalties.
Predicting which way rates will go is the hard part. But the market does help to decide this for you. Many factors influence interest rates – the health of the economy, inflation, exchange rates and the availability of capital. But generally speaking, when the fixed rate is lower than the variable, the market is suggesting rates will remain the same or reduce. When the fixed rate is higher than the variable, the market is predicting rates will rise.
Regardless, the most important issue when interest rates rise is to ensure you have the most cost-efficient loan available to you. To review your loan and compare it to all on offer, call to arrange an obligation and cost free assessment with our finance division – Specialist Mortgage.
We also post the current variable and fixed rates available on our website so you can check what is on offer online whenever you wish.
