To fix or not to fix (your mortgage), that is the question …

There has been a lot of talk about interest rates – are they to continue going down (in Australia) or are they going to go up in the not too distant future?
The simple answer is – no one knows for sure. However, we can look at some numbers and see what they imply.
I looked at one of the bank’s Basic Home Loan Package and compared their variable rate with their fixed rate over time (as an example):

I also recently received the following commentary from an experienced stock broker I know:
Forward Yield Curve – with the RBA (Reserve Bank of Australia) leaving its official interest rate “on hold” at 2.5% there are more economists moving to the view that there will be no further cuts in this cycle, as the A$ has been declining. Whilst it’s not actually the RBA’s mandate to ‘set’ the exchange rate (bearing in mind that we have a floating rate mechanism) it clearly has an influence on domestic economics including inflation (which is within its mandate) and employment. Of course govt. policies in many areas also influence the currency (eg foreign investment rules, taxation, tariffs & protection for local industry). Nevertheless, the 18 month forward yield curve is reflecting a rise in interest rates in (possibly) 9 months from now, in expectation that eventually the RBA will move towards a tightening bias. It currently has an easing bias due to low inflation, rising unemployment and an A$ that is still too high (5/12/2013 Danny Dreyfus, Morgans). Note – this is a view point and no guarantee it will happen.
What does this all mean?
In a “normal” growing economy, fixed rates are usually 2 or 2.5% higher than the variable rate. If you look back in history, fixed rates usually moved higher well before the RBA started increasing the cash rate. This means it may be a good time to consider fixing part of your mortgage / home loan at current (historically) low fixed rates.
Although I no longer have a mortgage, I did once, and I had fixed part of my mortgage / property loan in the past when I thought it was a good time to do so. And I only fixed part of my mortgage so that I could continue to pay down the variable component. By locking in part of my mortgage into a fixed-rate for a number of years, I was able to have certainty over my cash-flow (money coming in versus money going out).
If you are not sure what to do, you should seek advice from a professional mortgage broker or financial planner.  But now is the time to start thinking about it. If you wait until the RBA cash rate starts to rise, you will have missed the boat.

I would also like to wish you and your family a wonderful Christmas and

a safe & prosperous New Year.

Sofie Korac AFP, BAppSc, GDipFP
Financial Adviser | Prudentia Financial Planning
Authorised Representative AFSL No.400164
GEM Advisers Pty Ltd (T/as Prudentia Financial Planning) is a Corporate Authorised Representative AFSL No.337432 of MY Adviser Pty Ltd AFSL/ACL 238307.
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