As of June 2010, the Reserve Bank has raised interest rates six times at its last eight board meetings. And until recently that trend looked set to continue. But turmoil in Europe has some analysts predicting that interest rates could even fall if there is a knock on effect in the global economy. Other analysts are saying there's more rate rises on the way, just not yet.
So right now it's hard to predict the future, which is why locking in a fixed interest rate on your home loan can look attractive, particularly if you own an investment property and want some reassurance on what your monthly expenses will be. However, keep in mind fixed interest rates are, most often than not, higher than variable rates at the moment.
A quick check of the ‘Big 4′ bank websites shows their 3 year fixed interest rates range from 7.39% p.a. to 7.79% p.a., compared to the variable interest rates from 6.86% p.a. to 7.64% p.a. It pays to shop around.
Mortgage Choice has dozens of lenders on our panel, so you may be able to get an even lower rate, like Heritage Building Society's 1 year fixed rate of 7.09% p.a., against their variable rate of 7.15% p.a.. So you could even get a lower rate when locking in, which is a pretty attractive option. It always pays, though, to talk to a mortgage broker to help you choose what might be best for you.
Also remember that you have less flexibility with fixed rate home loans. Generally, you're limited as to the amount you can make as extra repayments (if you're allowed any at all) and you may not be able to take advantage of redraw and offset accounts.
There can also be quite significant costs if you wish to exit (or break) your home loan before the end of the term because lenders generally charge you for “breaking” your home loan contract with them. If the RBA keeps interest rates where they are for the time being then a variable rate with, say, an offset account or redraw facility could be your best option.
Of course you could consider an each way bet, splitting your home loan 50/50 fixed and variable. And some borrowers opt to do just that. Right now though, Mortgage Choice figures show the vast majority of home buyers are choosing variable rate home loans.
So… should you lock in a fixed rate? Or benefit from the extra features that come from a variable loan? To help you decide, we'll be watching the RBA's movements with interest over the coming months.