To fix or not to fix (your mortgage), that is the question …

There has been a lot of talk about interest rates – are they to continue going down (in Australia) or are they going to go up in the not too distant future?
The simple answer is – no one knows for sure. However, we can look at some numbers and see what they imply.
I looked at one of the bank’s Basic Home Loan Package and compared their variable rate with their fixed rate over time (as an example):

AMP Basic Package

2-Aug

3-Oct

7-Nov

5-Dec

Variable Rate Loan

5.45%

5.20%

5.20%

5.20%

1 Year Fixed Rate

4.89%

4.69%

4.69%

4.69%

2 Year Fixed Rate

4.89%

4.69%

4.79%

4.79%

3 Year Fixed Rate

4.99%

4.79%

4.89%

4.89%

5 Year Fixed Rate

5.99%

5.69%

5.69%

5.69%

I also recently received the following commentary from an experienced stock broker I know:
Forward Yield Curve – with the RBA (Reserve Bank of Australia) leaving its official interest rate “on hold” at 2.5% there are more economists moving to the view that there will be no further cuts in this cycle, as the A$ has been declining. Whilst it’s not actually the RBA’s mandate to ‘set’ the exchange rate (bearing in mind that we have a floating rate mechanism) it clearly has an influence on domestic economics including inflation (which is within its mandate) and employment. Of course govt. policies in many areas also influence the currency (eg foreign investment rules, taxation, tariffs & protection for local industry). Nevertheless, the 18 month forward yield curve is reflecting a rise in interest rates in (possibly) 9 months from now, in expectation that eventually the RBA will move towards a tightening bias. It currently has an easing bias due to low inflation, rising unemployment and an A$ that is still too high (5/12/2013 Danny Dreyfus, Morgans). Note – this is a view point and no guarantee it will happen.
What does this all mean?
In a “normal” growing economy, fixed rates are usually 2 or 2.5% higher than the variable rate. If you look back in history, fixed rates usually moved higher well before the RBA started increasing the cash rate. This means it may be a good time to consider fixing part of your mortgage / home loan at current (historically) low fixed rates.
Although I no longer have a mortgage, I did once, and I had fixed part of my mortgage / property loan in the past when I thought it was a good time to do so. And I only fixed part of my mortgage so that I could continue to pay down the variable component. By locking in part of my mortgage into a fixed-rate for a number of years, I was able to have certainty over my cash-flow (money coming in versus money going out).
If you are not sure what to do, you should seek advice from a professional mortgage broker or financial planner.  But now is the time to start thinking about it. If you wait until the RBA cash rate starts to rise, you will have missed the boat.

I would also like to wish you and your family a wonderful Christmas and

a safe & prosperous New Year.

Sofie Korac AFP, BAppSc, GDipFP
Financial Adviser | Prudentia Financial Planning
Authorised Representative AFSL No.400164
GEM Advisers Pty Ltd (T/as Prudentia Financial Planning) is a Corporate Authorised Representative AFSL No.337432 of MY Adviser Pty Ltd AFSL/ACL 238307.
General Advice Disclaimer
Information contained within the above article is of a general nature only and is provided exclusively for the clients of GEM Financial Planning. Individuals should not act upon any such information without prior consultation with a qualified financial adviser to ensure that any action meets their personal financial needs, situation and objectives.  No responsibility is accepted by GEM Advisers Pty Ltd or their representatives for those persons acting on information contained herein and persons do so at their own risk.
We believe that the information contained herein is accurate and reliable, being based upon GEM Financial Planning’s understanding of legislation at the date of publication. Legislation changes may occur quickly. Formal personal financial advice should be sought before acting in any of the areas discussed.
Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended. All expressions of opinion are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated.
 

More Articles

Why crypto treads an uncertain path through tax minefield

The taxation of digital assets used for lending and borrowing would benefit from clear-sighted...

Read full article

Wheat Production by Country

Check out the countries that produce the most...

Read full article

Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’

Following years of mixed messaging, Labor has bowed to economic pressure and announced changes to its stage...

Read full article

Investment and economic outlook, January 2024

Region-by-region economic outlook and latest forecasts for investment returns. . What might shipping...

Read full article

Quarterly reporting regime means communication now paramount: expert

Communication between SMSF trustees, accountants and advisers is more crucial than ever with the quarterly...

Read full article

Four timeless principles for investing success

Investing success can mean different things to different people. Being clear on what success means for you is...

Read full article

Plan now to take advantage of 5-year carry forward rule: expert

This is the last year that the five-year catch-up contribution rules for concessional contributions can be...

Read full article

Super literacy low for cash-strapped

Financial literacy around superannuation is poor for many lower-income people, who still question why they...

Read full article

Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

Financial Services Guide - Disclaimer & Privacy Policy

^