Is now the time to fix interest rates?

Eighteen months ago when I first wrote about fixing interest rates there had been just two RBA rate rises and fixed rates were much higher than the variable interest rates. It was also still early in the recovery and for many it may have been too early to call. So a decision not to fix interest rates may have been easier to stomach.

Now fixed interest rates are similar, even lower than the variable rate as shown in the table below. And while the RBA has recently softened its talk future rate rises seem probably to many – especially those living in boom regions. So fixing rates may be starting to look attractive to some.

Source: Cannex (accessed 20th April 2011)

History

The real problem with fixing anything for a time period is that you need to be very confident in the accuracy of your crystal ball. The last boom seemed to last long enough to affect people’s memory and lull them into thinking it would go on for much longer.

Inflation was getting uncomfortable for the RBA so rates had been up going up. That lead many of the boom-believers to fix their interest rates in the hope of beating the rises – sometimes for 3 and 5 years.

What transpired was much gnashing of teeth when interest rates plummeted, as summarised in the graph below of the RBA cash rate.

The consequence of an error-prone crystal ball can be very costly.

So should you?

For a detailed examination of the considerations in fixing rates read my earlier article. There are some circumstances when you would fix interest rates.

Right now include the following when contemplating your decision:

  • The recovery is not certain. Rates may not move for some time. So if you fix your rate you may trade off flexibility for no benefit.
  • Another sharp down-turn is possible. How will you feel if you’re paying a higher rate than the variable rate?
  • The future gets increasingly uncertain the further out you project. Exercise greater caution when considering longer terms for fixing rates.

A personal observation

In my role as a financial planner I have seen how rapidly people’s life and goals change in just a few short years. For those who fixed their interest rates (before becoming clients) I’ve noted how the lack of flexibility has inhibited their money management and wealth creation.

Don’t underestimate how quickly life evolves.

If you’ve had some big changes in the last 3 years then maybe you also will in the next 3 years – it may just be the way you roll. So,  perhaps a 3 year fixed rate is not the best thing for you right now.

Author: Matt Hern

Certified Financial Planner professional, Matt Hern has three times been awarded as one of Australia's Top 50 Financial Planners by The Australian Financial Review Smart Investor. He is passionate about guiding you on the right financial choices to achieve what you really want. Matt Hern is an Authorised Representative of Charter Financial Planning Limited AFSL 234665. All information is general advice only.