Stick with variable rates
THE expected interest rate rise didn’t happen last week but you can bet that more rises are on the cards. As a result many people are asking "Is it the right time to lock into a fixed rate?"
Unless you are terrified of rates rising, my inclination is to stay with a variable rate to give yourself flexibility. Remember, insurance always has a cost - if rates start to fall you will be locked into the higher rate and may leave yourself open to a hefty penalty if you try to get out of your fixed rate loan before the term ends. Often the penalty will be equal to what you would save by re-financing the loan to a variable rate.
Whenever you make financial decisions you have factor in some assumptions. Right now the variable rate is about 7% and most five year fixed rates are around 8%. Rates tend to rise in .25% increments so it would take four rate rises before your current variable rate went up to the current five year fixed rate.
A disadvantage of fixing rates is that you can lose flexibility if you wish to make lump sum payments, or need to pay the loan out because you’ve sold your house. I suggest you stay with variable if selling in on the cards, but if you are sure you will be staying put, and think you will be able to make extra repayments, you could consider converting your loan to a “cocktail”, where part of the rate is fixed and part is variable. Then you could pay any surplus funds into the variable portion of the loan without penalty.
Finally, always check out what fees are involved if you wish to refinance. There is no point in refinancing if the costs outweigh the benefits.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.