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Fixed rate madness | Updated: 7:56:24 AM, Wednesday October 17, 2012
By Bruce Brammall
To fix or not to fix? That is indeed the ultimate home loan question. But it’s a question that can also induce panic, stress and general uncertainty.
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Fess up. Who doesn’t occasionally succumb to a panic attack? Usually, panic bobs up when we’re at our most vulnerable, our most irrational, our most stupid.
It’s natural to look for a lifeline when we’re feeling stressed. A tourniquet to stem the bleeding. A silver bullet to … you know … kill the “American Werewolf in London” that’s threatening to tear our little world apart, limb by limb.
There’s little that makes us more stressed financially than our home loans – certainly in the first five years or so of a big, new mortgage. But it’s here that so many of us make our dumbest, most costly, errors.
A recent survey by Mortgage Choice claimed the number of home buyers fixing their loans dropped to a one-year low. Less than 15 per cent of Australians buying their first homes took a fixed rate. That was 27 per cent below the average for the previous six months.
I’m not advocating fixed interest rates. Over the course of a home loan, variable interest rates will be around 0.3 per cent cheaper than a three-year fixed rate loan.
But I do understand why some people sign up for them. And why so many more are occasionally tempted. Like that rag Peanuts’ Linus carries around with him, it’s a security blanket.
If you stick with variable rate loans through your mortgage, and test your bank against the competition (via a mortgage broker) every few years, you’ll likely end up ahead.
But there will be pain, occasionally.
Sure, you’ll have periods when your mortgage repayments are extremely low. But you’ll have periods when they’re extremely high. Both will be short-lived. Most of the time, your rate will be about “average”. Stick with it. You’ll probably “win”.
But about 30-40 per cent of home buyers are now, have in the past, or will consider in the future, taking out a fixed rate loan on their mortgage. That’s who I’m talking to.
A fixed rate mortgage loan is one of two things. The first is the insurance policy. You want to know what your repayments are for a given period of time, two, three or five years, generally.
The second is you think you can beat the banks’ best brains by getting the timing of your fixed rate loan right. Good luck. Most of you will get that punt wrong.
Panic leads to irrationality. When the media hype is at its strongest and the free advice from the unqualified around the barbeque is at its feverish best … that’s when most hit the “escape” button.
Pity those who locked in early in 2008, when five year rates were around 8.5-9 per cent. They’re in pain right now. And many will be until early next year.
If you’re the sort who occasionally considers fixed interest rates for the security, even knowing that you’ll probably end up behind, then why aren’t you looking now? Because your current variable rate is so comfortably low, that’s why.
Spend five minutes on compare.bigpondmoney.com.au. You’ll find dozens of rates for two and three years below 5.8 per cent. Most will have fees and charges involved. Many loans will be inflexible. Many will mean the loss of benefits, such as offset and redraw facilities.
But fixing now makes more sense than fixing in a couple of years, when rates, as they will, start rising again. Or, back to the future, in February 2008.
If you’re going to fix, fix at the bottom, not the top of the Reserve Bank’s Grinch season.
Interest rates rise for a while and we start hyperventilating. We reach for the brown paper bag in the form of a fixed interest rate.
If you’re considering fixing, understand the risks you’re taking. You will probably pay more for security, that’s a near certainty.
You can’t use an offset account on a fixed rate loan. Consider keeping a portion (up to 50 per cent) as variable, so that any savings you managed to accrue will work hard for you.
Be aware that your circumstances can change. Fixed rates aren’t particularly conducive to change. You might need to upgrade, move suburbs, move interstate.
You might lose your job and need to sell. Fixed rates, in these circumstances, can become an even bigger noose around your neck.
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Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. email@example.com.
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