TRUE NORTH
By Ian Pepper, Penguin Financial
NOW is the best time to consider a fixed interest rate with growing expectations the Reserve Bank will reduce interest rates in coming months, possibly as soon as the Melbourne Cup day meeting.
As a result the lenders in Australia have been able to offer fixed rates for 1-3 years that in most cases are lower than the current variable rates.
Consider the table below:
FIXED RATE
1 YEAR 3 YEARS
Some of the lenders above offer discounts on these rates for packaged loans and some offer different rates for existing or new customers and different loan amounts.
Most variable rates at present are around 7%. Even if you are fortunate enough to have a large discount from your current lender, it is unlikely that your rate will be lower than the fixed rates currently offered.
So the question is: will variable rates go lower than these fixed rates offered? If I knew the answer to that, I could probably make a lot of money on the financial markets! However I can tell you some historical facts which might provide some guidance to the future.
According to Reserve Bank of Australia statistics, the average basic variable interest rate of all Australian lenders has gone below 6% on three occasions in the past 30 years, including during the GFC in 2009. The rate rarely stays below 6% for long – lasting only 10 months in 2009.
Fixing your mortgage interest rate does have its downsides. One is missing out on the savings offered by variable rates should interest rates drop dramatically and for a long time. Another is the break costs involved to exit the fixed period early and also the limited ability to pay extra off your loan.