The Trump Factor, Will fixed rates protect you from volatility?
When US President Trump was first elected, a wave of uncertainty washed over the world of finance, causing investors to seek safe havens for their wealth. The 45th president’s election victory led to the price of gold breaking through the US$1300 an ounce mark, while US treasuries rose 10 points. There was also speculation that investors could start moving their money from shares to property – specifically Australian property, generally considered to be one of the safest markets in the world – as they wait to see the fallout.
The world’s now had some time to adjust to the new political landscape, however many are still playing it safe. At the most recent meeting of the Reserve Bank of Australia (RBA) in March 2017, when faced with a choice of raising the nation’s official cash rate to help reduce the risk of a housing bubble, or lowering the rate to make up for slowed growth in wages and jobs, the RBA instead elected to keep the cash rate on hold at its record low of 1.5% for the seventh month in a row. With these and a range of other factors to consider, it’s not easy to predict what the RBA’s decision may be for its next meeting.
So with investors and institutions around the world looking to reduce their level of risk in the face of uncertainty, should Australians follow suit when it comes to what is often their most substantial investment – their home loan?
Should you fix your home loan interest rate?
If you have a home loan with a variable interest rate, the amount of interest charged with your repayments may go up or down from month to month, depending on the interest rates set by your lender. The movement of variable interest rates is usually influenced by Australia’s official cash rate, as set by the RBA, though not always. Australian banks have recently been moving out of step with the RBA and raising interest rates on home loans for investors and, more recently, owner-occupiers to better preserve their interest rate margins and profits.
By fixing the interest rate on your home loan for a length of time (anywhere from 6 months to 10 years), you can temporarily “lock in” the amount of interest you’ll be charged on your home loan. No matter the conditions of the world economy, or the decisions of your lender, you’ll be paying the same amount of interest on your home loan for the duration of the loan’s fixed term.
The primary benefit of a fixed rate home loan is that it keeps your repayments stable and consistent. If your lender was to sharply raise its variable interest rates, you’d continue to pay your fixed rate, saving some money on your loan. Plus, fixed rates mean fixed repayments, which can massively simplify your household budgeting.
Fixed rates also have downsides to consider. If your lender was to lower its variable interest rates, you’d be stuck paying the higher fixed rate, without enjoying any savings. Fixed interest rates often mean fixed repayments, with less flexibility around how you repay your loan, and significant break costs if you refinance ahead of schedule. Finally, it’s important to keep the fixed home loan’s revert rate in mind – make sure you’ll still be able to afford the loan once the fixed rate period is up!
Is now the right time to fix your home loan?
Deciding whether or not to fix your home loan’s interest rate, either with your existing lender or by switching to another, can be a challenging decision. If you’re not certain whether or not a fixed interest rate would suit your finances, contact a financial adviser.
At the time of writing, fixed interest rates are relatively low, with several lenders offering fixed rates below 4%. For example, the discounted-rate Ultimate Fixed Home Loan from Greater Bank (recently the 2016 winner of the Roy Morgan Customer Satisfaction Award – Bank of the Year) currently offers a fixed interest rate of 3.79% for 1 year:
Following the announcement of the Trump presidency, it was forecast that fixed interest rates on home loans may soon begin to rise, due to expectation of renewed global economic growth pushing up bond yields, off which fixed mortgages are priced. So if you’re looking for added security in your home loan, and feel that fixing your home loan’s interest rate may suit your financial situation, it could be a good time to conduct your search for home loan options.