Interest rate rises are on the way; so should you brace for the variable hits or cover your back and lock in a fixed rate?
As the economy turns a corner, economic commentators are in two minds about whether borrowers should fix their mortgage at a relatively high interest rate or sign up for an historically low variable option.
Economists predict we are looking at a fourth consecutive rate rise after a surprise surge in jobs on Thursday showed yet again the strength of the Australian economy.
The national unemployment rate fell to an eight-month low of a seasonally adjusted 5.5 per cent in December, down from a revised 5.6 per cent in November.
Some economic commentators are even forecasting a 50 basis point interest rate increase when the Reserve Bank of Australia (RBA) board meets on February 2.
Housing Industry Association chief economist Harley Dale said any decision to fix or go variable depended on an individual’s financial circumstances and how they felt about a level of certainty.
“If you feel as though you need some more certainty and wonder whether you should lock in or not, I guess on the one hand, to an extent, the horse has already bolted,” Mr Dale said.
“Fixed rates went a long way in the first half of 2009 from a very low level so at the moment you’re probably still best off with a variable rate.”
However, he said there were some people who felt Australia could be looking at central bank interest rate rises of more than 25 basis points.
“Maybe, if you’re looking out at the next couple of years, maybe we’re going to get more of a tightening cycle than people first thought because we’re going to be rapidly moving back towards a very strong economy,” he said.
“If you’re taking that kind of view and you need peace of mind, then maybe you should be reassessing your view now as to whether you want to lock in part of your mortgage.”
Meanwhile Canstar Cannex senior financial analyst Harry Senlitonga said there was currently on average about a 1.1 per cent difference between standard variable mortgage rates and the most popular three-year fixed interest rate.
His company, which compares mortgage rates, presented two perspectives on fixing to borrowers, with the first group asked to treat fixing like an insurance policy while the second group was encouraged to save money by fixing early.
“We expect the fixed interest rate will increase in the next couple of weeks,” Mr Senlitonga said.
In order for borrowers to get ahead on a fixed loan, variable interest rates would have to overtake the fixed rate within 18 months during a three-year fixed period.
“Say you’re paying $400 extra a month for 18 months, to make it break even, you’d have to be better off $500 a month in the second half of the three years.”
He said some borrowers were happy to pay a premium to cap the maximum they would have to pay per month.
“If they pay extra, that’s an insurance premium. Everyone pays insurance these days.”