The question I get asked more than any other right now is – should I fix my home loan?
My answer, as from an hour ago, is clearly yes…
The reason is that the Commonwealth Bank has just put its standard variable home loan rate UP! The NAB has said that rates are under review, and the other big banks are no doubt doing the same. This means that regardless of whether the RBA keeps cutting rates or not, the banks are clearly signalling that they are done with cutting theirs.
I also think that we are at, or very near, the bottom of the Reserve Bank rate cutting cycle anyway. There is light at the end of the economic doom and gloom tunnel, our resources driven economy continues to show signs of strength, our government continues to announce spending plans, and there is renewed optimism. All this points to a recovery of business activity and growth. In fact we are seeing it as well, with things like advertising rates going up in the last month with our own advertising. All this growth reemerging means the RBA can stop the rate cutting, probably now but perhaps a small additional cut or two at most.
Even before CBA’s move today, the banks have stopped passing on rate cuts. The last RBA cut was a Claytons rate cut, because the banks didn’t pass it on anyway (well only 40% of it to be precise). It was a clear message, they’re done going down. CBA’s move today is simply a continuation of that message.
It is also worth considering that picking the exact bottom isn’t necessary anyway if you take a long term view. Even if there is a little further to go (and if there is we can only be talking small drops, we’re already at the lowest rate level ever), over a long term view we’re so close to the bottom that long term decision making should be rewarded.
So all that says to me that it is a good time to lock in a fixed home loan rate while we’re at or near the bottom of the rate cycle. If you lock in a fixed rate for say 5 years, it’s hard to see how that won’t be a lower rate in 2014 than the variable rate will be by then. In all likelihood we’ll be back in booming economic times and the rate cycle will be up already or on the way. A decision you make today could lead to a pleasant experience reading your home loan statement in 5 years!
In fact I happened to see an email newsletter from March 2008, just over a year ago, and it advertised the My Rate Home Loan at 8.44%. My Rate Home Loans are now at 4.99%. If rates can come down that fast in a year, then think how much they could move up over the next 5 years.
And locking in a fixed rate today can get you rates well below this March 2008 level. For example with RAMS Home Loans you could get a 3 year fixed rate at 5.89% and a 5 year fixed rate at 6.49%. To lock in that sort of rate for that sort of time seems nothing but sensible to me.
Fix now before the banks move their fixed rates up. This is inevitable now in my mind, as they try to quickly adjust. Be savvy and move before they do.
So fix away and sleep well. Over the long term it will be a winning decision.
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