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Everyone seems to be asking the million dollar question at the moment, is now a good time to fix my debt?
The response very well could be how long is a piece of string?
Why? Because most people I have met are unable to predict the future.
Let’s push crystal balls aside and touch on a few points to support the case for fixing –
• Interest rates are at historical lows. Over the last 15 years I cannot recall interest rates being lower than 4.99%. Currently there are some lenders whose interest rates have breached this historical interest rate barrier.
• The reserve bank interest rate is the lowest it has ever been at 2.75%.
• History is usually the best guide for what will happen in the future. Given we currently have historically low interest rates you could surmise they are unlikely to go much lower.
Now, a few reasons for holding your fire –
• Interest rates could drop further as some pundits are predicting (using that crystal ball no doubt!)
• If you are on a variable rate loan most lenders will allow you to fix part or all of your debt anytime without cost
• Historically speaking the analysis suggests that most people have been better off riding out a discounted variable rate rather than fixing debt. Another way to look at it is, the banks have usually made more profit when people have fixed there loan v’s riding the discounted variable rate.
So given all this, I can hear you asking the question, so how do i make a decision then?
You may even suggest that I should get off the fence and make a call one way or the other!
As with all financial and investment decisions when we remove the emotion and boil it down, we can better appreciate that our decisions should always be made to enhance our lifestyle and peace of mind. So let’s bring the conversation back to your personal circumstances and preferences. Here are a few key questions you should ask yourself –
• Would you like more certainty in knowing what your loan repayments will be?
• Do you feel like you are stretched with your cash flow?
• Do you have little equity or cash buffer to draw upon if things got tougher?
• Are you risk averse?
• If rates kept going lower after you fix, would you be comfortable knowing that you cannot access the lower variable rate without a hefty penalty that would almost certainly make it non-beneficial to get out of your higher fixed rate?
• Are you confident that you will not sell your house or want to refinance during the fixed rate period?
• Do you have non-deductible and deductible debt, and would you feel more comfortable knowing that you had a set repayment for part or all of one or the other?
If you answer yes too many of these questions, then you are starting to build a case for fixing your debt.
Ultimately, choosing to fix, like most financial and investment decisions should be dependant primarily on assessing your own ‘personal economy’ first and foremost with the ‘external economy’ providing a secondary perspective for decision making.
Fixing really is a risk management strategy so you would be well placed comparing the decision of fixing your loan to that of paying an insurance premium. You hope you don’t need to make a claim (ie variable rates have increased), but if you have to, you will happy that you had it in place. The overarching philosophy when making the decision is “will it help you sleep better at night irrespective of what rates do in the future during the fixed period?”
Finally, remember that most fixed rate loans have limitations on making additional repayments and do not offer redraw or offset functionality. This means that it usually makes sense to keep an amount of the debt variable permanently. That amount should be at least equal to, or slightly more than you think you could repay during the fixed rate period.
Happy fixing and may your ‘crystal ball’ be tuned in when you make the call. Better yet, have a chat with your trusted mortgage or financial advisor, if you are fortunate enough to have one, before making the big decision.
Written by David Johnston, founding director of Property Planning Australia (PPA) and co-author of Property For Life – Using Property To Plan Your Financial Future. Property Planning Australia was established in 2004 and is a multi-award winning property, finance and financial planning consultancy that provides its clients with a holistic approach to financial and investment advice.
The PPA team specialise in developing holistic property strategies for first home buyers, investors, upgraders and those transitioning into retirement. To find out how PPA can help you make the right property decision today for your tomorrow, contact us.