It's time to revisit the old question; “To fix, or not to fix?”. Recent rate moves from the Reserve Bank, show that the current low “emergency” rates are coming to an end and will start heading upwards again. It might be time to start considering your options, and whether or not you're ready for any rises that might come. It depends on how fast they'll rise and how big a rise you think you can handle but if you don't have much room to move in your budget, you won't want a nasty shock later on.
We reckon the time to fix is not when you think the market has bottomed because that's not so easy to pick, the time to fix is when you feel comfortable with the rate being offered and safe in the knowledge that for the fixed period at least, you can afford your mortgage repayments. Here is an example of what rising rates can mean, and how they compare to fixing at the rates offered now.
Say you're on a $380000 loan on a variable rate of 5.21 per cent over 30 years. You'll currently be paying $2089 a month in repayments. On a 6.99 per cent 3 year fixed rate you'll be paying $2528 – a whole $439 more a month. This seems no contest, who'd want to pay all that in an era of historically low rates.
But say rates increase by two percent, so that the variable rate is now 7.21 per cent. You're now being set back $2583 a month, $594 more a month than today's variable rate. If you reckon you might struggle and think a 2 per cent rise might seem a little extreme, remember that 12 months ago a good competitive discounted variable rate was 8.74 per cent! If we returned to those levels, you'd be put back a whopping $2987 a month, almost a thousand more a month than today's rates!
Keep in mind that fixed rates normally come with a lot of restrictions* and in the event, unlikely as it might currently seem today that fixed rates come down, you could be up for very high exit costs to get out early.
No-one, not even Governor Stevens, knows how fast rates will go up or by how much, but if you think you'd have troubles paying the fixed rates being offered now, you should consider whether your budget could handle the hit from an even higher variable rate in the future. If not, perhaps the security of a fixed rate is worth considering.
* Most lenders restrict principal repayments and redraw on fixed rate loans. The Rock Building Society offers fixed rates with 100% offset accounts and or fixed rate lines of credit.
