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Don’t fix your mortgage rate: Here’s why

Fixing rates is the expensive error borrowers often make near the top of a rate cycle.

Compilation image of crowd standing watching a property auction and hands holding fanned out cash to represent mortgage rate
National Australia Bank joined rivals and cut its fixed mortgage rate last week. (Source: Getty) (Samantha Menzies)

The economic tide is turning. It’s too early to call the end of interest rate rises - last week’s inflation figure was still too high - but it’s vital that you don’t make an desperate and expensive mistake and fix your mortgage rate.

Let me explain why using the last big interest-rate peak as an example.

Read more from Nicole Pedersen-McKinnon:

Back in 2007-2008, official interest rates surged and pushed mortgage rates 3.5 percentage points higher than today’s rate. Hundreds of thousands of borrowers, driven by financial stress and the fear of more hikes, decided to fix their mortgage rate.

Then the global credit crack-up hit. In an effort to dampen economic shock and stave off recession, the Reserve Bank of Australia (RBA) slashed the cash rate by 425 basis points in just seven months and the rate tumbled to an emergency-low of 3 per cent. Those borrowers who fixed their rates were then stuck paying 10 per cent mortgage interest… for years.

I still recall the distress emails and messages I received: “Is there any way we can get out of the fix?” “The break costs are tens of thousands of dollars - would it be worth leaving anyway and going variable?” The answers were yes and no, respectively, devastatingly.

What will happen with interest rates next?

It is very possible that we are, again, close to that interest inflection point… when the economic pain in households around the country has become so acute that rates may soon be cut. It’s vital then to avoid making the same mistake that so many mortgage holders did 15-16 years ago by succumbing to blind panic at the prospect of additional hikes.

Last week, National Australia Bank (NAB) joined rivals and cut its fixed rates.

Number of lenders that have changed at least one fixed rate in the last month

lender rate table
(Source: RateCity.com.au) Note: some lenders have made both cuts and hikes.

Cuts to three-year fixed rates are the most common. For example, NAB cut it’s one-, two- and three-year fixed rates to 5.89 per cent, 5.79 per cent, and 5.54 per cent, respectively, from 6.04 per cent each. The lender’s four-year fixed rates have been cut to 6.04 per cent, from 6.34 per cent while it’s five-year rates have been cut to 6.19% from 6.44 per cent.

RateCity says that ANZ’s 5.49 per cent three-year interest rate makes it the lowest of all the Big Four, while the cheapest fixed rate on the database is The Capricornian’s three-year rate at 4.99 per cent.

Lowest fixed rates on RateCity.com.au

lender rate table

Did you notice that NAB’s four- and five-year fixed rates are higher than the shorter periods? That suggests interest rates may have, by then, resumed going up again, making it the start of the next hike cycle. But, let’s face it, we now know all too well that economists and analysts get that wrong all the time.

What you may not realise

Since the unexpected rate rises began in May last year, variable rates have been lower than fixed rates.

This means two things:

1. By succumbing to a financial panic to fix, you’ve had to immediately suck up far higher repayments.

2. Getting approved for a fixed rate now requires larger income and/or lower expenses because you have to pass the so-called serviceability test on any loan.

The hurdles to secure a fixed-rate loan have been harder to clear. But all of a sudden they’re an attractive option - you might even get one cheaper than your current variable rate, meaning your repayments fall immediately.

But therein lies the trap: you would not be able to get such cheap fixes unless the bank’s economists believed that the cash rate was about to fall and that variable rates would soon go lower. You want to be able to, mercifully, ride the cycle down with a variable rate.

Which lenders now offer the most competitive variable rates in the market? I will reveal the country’s cheapest, best-quality variable loans, in my very next column.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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