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Decreasing Interest Rate: To Fix or Not To Fix
By Denis Kristanda
While in US the interest rate is already practically 0%, in Australia the interest rate still have room to go down. This week, Reserve Bank of Australia make the latest move to stimulate the market and producing another 25 basis point cut to 3%. As every interest rate change, the crucial question to every mortgage holder is whether to fix the rate (expecting interest rate to go up/bounce back hence preventing paying more expensive repayment) or keep it variable (expecting the interest rate to further go down, hence enjoy cheaper repayment)? (Variable Rate is known as ARM- Adjustable Mortgage Rate product in US) Economic Situation
Let us see quickly about the economic situation. We probably now can conclude that the worst have been behind us. With coordinated effort around the world we even see some sign of early recovery. But in the short term the economy will be still not that stable. So what is more likely: the economy will soon rise up and threatening with inflation risk -or- the economy will be stagnant even go down a little trying to go back up, but in slow motion? I will say with great confidence that later will be more likely. So, the interest rate will be stay the same or even go down a bit, and will stay there for a while before bounce back to the upside. The actual difference of fix and variable rate is too wide
Currently the 5 year fixed rate in Australia are about 6.2% and the variable is on low 5%. With this wide gap, switching to fixed rate will immediately make you worse off (pay more instead of saving) not to mention there will be some fee to change over. The advantage of variable rate mortgage
There is one more advantage of having variable rate product as it will allow to have "offset account". Any money that you put into this account will be reducing the principal of the homeloan, but you allowed to access the money anytime you want (just like saving account). This is ideal for your emergency fund where you want it always stand by there, but you can make it reducing the mortgage repayment. Conclusion
Considering several factors above, do NOT fix your mortgage rate as yet. The interest rate still might go down a bit, but even that at least it will stay a while before climbing up again. For further reading, please continue reading on several related articles below. Hope this help. |
Another Rate Cut, Is it time to Fix Your Mortgage ?
| Offset Account: A Must Have For Your Mortgage
| Mortgage: Change To Fixed Rate or Keep It Variable ?
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