Part three – Should I fix my interest rate now?

In most cases, no. Individual advice cannot be provided in an article, but we can provide some food for thought below.

Of course, there are always exceptions. On one income for one year and can afford the repayments on a 3-year fixed rate? Then if it is your preference, by all means go ahead. Is it a good idea? Well…

There are a few important things to know about fixed interest rates.

Fixed interest rates can have massive exit costs.

If you try to leave a fixed interest rate before the end of the term, the bank will charge you the economic cost. Generally this is the remaining term and the difference between your rate and the rate at which they can re-lend the money. This can be a very large sum. You should never fix if you think you may want to sell or refinance within the fixed rate term.

Fixed rate precede variable rates

By the time you have heard that interest rates are going up, the fixed rates have already increased a few months prior. By the time we hit the top of the variable rate cycle, fixed rates will already be on the way down.

Fixed rates are priced to make the bank money.

It is not a case of saying ‘I like this variable rate, fix it please.’ Banks offer a certain rate for each term. They consider the rate on offer carefully in terms of what they expect interest rates to do over the 3 or 5 year term of the fixed rate and then price it accordingly so they will make a profit.

Currently fixed rates are significantly higher than variable rates. You would be lucky to find something under 5%, with many around 6% to 6.5% or more. Variable on the other hand, can start at 3.69%. If you take a fixed rate, you are committing to pay extra money into the banks’ profits until the variable rate catches up to your fixed rate. That extra money could have been spent paying down your loan.

Furthermore, it appears the fixed rate reduction cycle may have already begun as banks began reducing their fixed rates last month. You may well be fixing at the top of the cycle.

In most cases, a safer option is to work out the repayments on the fixed rates you would have taken and start making those higher repayments on your variable loan now.

If you are unsure, have investment debt, or have a complex situation, please seek advice as the information above is not tailored for individual circumstances.