With interest rates at historical lows is now the time to fix rates?

The recent RBA interest rate cut down to 3% for cash rate have many mortgage specialists suggesting that now could be the perfect time for mortgage holders to fix their loan.

In saying this there is never a direct Yes or No answer because everyone’s circumstances are different. However with rates entering historical lows it is certainly a very good time to consider fixing some, or all of your current home loan. And this makes even more sense if you have more than one loan or an investment property.

Key considerations

When considering to fix your rates it is important to consider the following:

  • You will have less flexibility with payments
  • You can’t make additional payments (although some lenders now allow between $5k and $10k per annum)
  • You cannot redraw additional payments
  • You generally cannot have a full offset account linked to your fixed rate loan
  • If you were to sell your property in the fixed term, you need to transfer the debt to another property, pay it out or suffer any penalties imposed.

But, for the restricted flexibility you get a fixed price for a fixed term that guarantees that your payment amount will not change.

Is it worth it?

I would argue that presently it is definitely worth considering a fixed loan if you are not planning on selling your home or investment property over the 3-5 year period you are considering fixing the loan. You may also want to consider splitting your loan into a partial variable that allows you to keep all the benefits of a variable rate such as additional payments, redraw, offset account, and then the second portion at a fixed rate that gives you the rate certainty and to lock in a very low rate.

Why are we suggesting this?

Over the long term any fixed rate that has been in the mid to low 5% range has proven to be an outstanding rate. We are now at those levels with 2 and 3 year fixed rates are presently starting as low as 5.29% and 4 and 5 years fixed around 5.9% range.

Will the cuts continue?

It is difficult to predict exactly where rates will go but some economists are suggesting that more cuts could occur. Westpac has revised its outlook for monetary policy and in their view the overnight cash rate will reduce to a low of 2.75% over a period of months. But even if this does occur some of the fixed rates on the market are 0.30% to 0.40% below the average standard rate, which means that even if the cash rate falls again (forcing the variable rates lower), there is still quite a buffer remaining.

What it means for investors

Investors who are able to structure their loan appropriately can capitalise by locking in these historically low rates. For example, by locking in a low 5.39% interest rate for a good yielding rental property which is achieving a solid 5-6.75% and with full tax depreciation benefits, the property will be positively geared by roughly $75-$100 per week.

We are seeing many clients who are making the most out of these low interest rates and see the benefits of positively geared properties in growing regions.