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This is not meant to be financial advice but I have been teaching and investing in property for a long time and I have never seen interest rates at this level. When we took out our first mortgage almost 30 years ago we were very grateful that the interest rate was only 13.5 per cent as some of our friends who bought a home soon after us had to pay 17.5 per cent. At the same time, interest rates for commercial property were over 20 per cent.
The good news is that interest rates are at almost at historical lows and will probably go even lower during this year. The futures market indicates that interest rates will drop by about 0.5 per cent this year. A couple of the major banks are forecasting that the interest rates will drop by more than 0.5 per cent. Only time will tell who is correct but there seems no doubt that interest rates will drop in 2013.
The bad news is that as sure as night follows day, interest rates will go up again sometime in the future. Interest rates move in cycles and once the economy picks up, so will interest rates.
So, how can you beat the possible future interest rate hikes? Fix your interest rate. Not only are all interest rates very low now but this is one of the very few occasions in history that fixed interest rates are actually below variable rates!
One of the great aspects of a fixed rate mortgage is that you know exactly how much your repayment will be over the period of time. You can sleep well at night knowing that your repayment will remain the same and not go up and down with the movement in the variable rate.
Before you rush out to your mortgage broker and/or bank to get a fixed rate mortgage, you need to remember that there are some risks involved. Suppose interest rates drop much lower than expected and stay there for many years to come? Suppose you need to sell the property before the fixed rate period ends? You should speak to your accountant and/or financial advisor before you make this decision as they should have a thorough understanding of your personal situation and will provide you with personal advice.
There is no guarantee of what will happen in the future. However, based on past performances in the Australian and global economic cycles and the movement of interest rates, the year 2013 will be a great time to seriously consider fixing all or a part of your mortgage. I will be!
Written by Peter Koulizos, university lecturer, author and buyers advocate.
