To fix or not to fix, that is the question!

Breaking news, the Reserve Bank of Australia (RBA) has announced that we could see an interest rate increase before the previously suggested 2024.

Earlier in the year, the RBA noted that it did not expect rates to rise until 2024, however, they have changed its message and now expect a rise before then.

They have not elaborated on when, so it could be in Q3 2023, however, reading market commentary, it’s expected to be sooner than that.

So, should you have a fixed-rate loan or remain variable?

When I ask most clients what their thought are in relation to fixed v variable, the general question that is fired straight back is “what do you think rates will do in the future?” Not having a crystal ball, it’s a hard question to answer, I could easily say rates will rise, but it may be 2-3 years before that occurs.

If we look at why many people fix, it is generally commented that they are trying to beat the bank, eg have a lower fixed rate than the variable rate over a period of time.

Currently, that is fairly easy to achieve, for the past year the fixed rates (1,2,3, and 4 yr) have been lower than the variable rates, something that I have never witnessed before.

However, fixing a loan should be done to provide certainty of repayments, rather than trying to predict the future.

One consideration should always be the rules around fixed rates. Generally, you can’t make additional repayments over the standard repayments (yes there can be some but usually very limited), in addition, most lenders won’t allow you to offset a fixed rate. The other factor is what are the penalties to repay a fixed rate before the term, when rates are rising,  the cost can be negligible, but if rates drop, then the penalties can be significant.

So, what to do now? Broadly, if the current fixed rates are lower than the variable rate offered by your lender and the RBA is suggesting that we may see a rate rise and you don’t want to offset/partially repay the loan, then maybe the answer is yes.

One consideration would be to split your current loan, have partly fixed and part variable, hedge your bets, so to speak…

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