Have interest rates finally reached their nadir? Recently, everything financial has been looking up. The All Ordinaries is up. The Aussie Dollar has been up against the US dollar. So, with all this economic enthusiasm, will rates go up soon too? Should you fix your home loan? Should you leave it variable and cross your fingers? In the September meeting, the Reserve Bank left rates on hold at a base rate of 3%, but there are hints coming that rates will rise either later this year, or very early next year. With that in mind, it's time to make some serious decisions about your mortgage.
Keeping on top of things
A mortgage, like other loans, should be regularly evaluated. It might mean fixing a loan, fixing part of it and leaving the rest variable, or perhaps doing nothing at all. What is important is that every so often you have a look at your loan (and, for that matter, other financial issues) and decide whether what you are currently doing is best for your long term financial health. My partner and I have a look at our financial situation every one to two years. It usually results in us doing very little, perhaps increasing a payment slightly, or investing an amount of money somewhere for a rainy day, but it means we are on top of the situation.
Should I or shouldn't I?
There are pros and cons involved with making changes to your loans. We're experiencing a nice slump in interest rates, which for the most part have been passed on by lenders. Fixing your rate at the moment would probably mean taking on a higher interest rate than what you're currently paying. While the next move for interest rates, in my opinion, will probably be upwards, that could be a few months off. Since I'm a financial masochist and want to pay my mortgage off in five years (yes, that's not a typo) I want my interest rate to be as low as possible for as long as possible. Fixing it, in my situation, would make it unnecessarily high for longer. It would also dramatically reduce the flexibility I have in paying far in excess of the minimum weekly repayment. Since my partner and I began bludgeoning our mortgage with extra repayments (take that, Banks!) two years ago, we resisted the urge to fix our rate by putting every spare dollar into the loan, to reduce our debt burden. We only have about three years to go on our mortgage, at our current repayments.
Look at your own situation
Now, my partner and I are lucky. We live in an area where the average house price is pretty low. We don't live in a major capital city, where house prices are exorbitant, and we didn't buy a flash house. It is certainly not where I fantasise about living the rest of my life. It was merely a stepping stone into home ownership. We have the option of kicking in extra into our mortgage. I accept that a lot of people I know (and a lot that I don't) have taken a huge financial burden on themselves to get into the housing market. It's a big risk, and it's worth it if you can keep everything together. You need to set yourself up for success so that you are able to keep it together, and that takes effort and planning. For a lot of people, that means doing it really tough. I acknowledge that. I do it tough out of choice. It's pretty soul destroying sometimes to be doing it tough without a choice.
Factor in future rises
If you're looking to take out a mortgage or a loan in the next few months, you should be factoring in an inevitable rise in interest rates. Don't make the fatal mistake of calculating the repayments on your debt based on current interest rates, because when the economy goes up (which it already is) rates will rise. Rates will go up. Unless the Earth is obliterated by an asteroid tomorrow, you'll be paying a higher rate on your loan in the near future. Bet on it.
To be sure, to be sure
However, if you're looking for certainty as far as your mortgage is concerned, you might want to talk to a mortgage broker, or your lender, about what options are available to you for fixing a loan. While short term you'll be looking at paying a slightly larger repayment, and you won't be able to pay much extra into your loan, you'll have the security of locking that rate for a period of a year or more. If you're looking for that kind of security, because of a change in your circumstances (such as a baby on the way, or suddenly dropping to one income instead of two) then paying a little more for the security of having a predictable expense might be worth it. A good night's sleep is priceless. However, you shouldn't make any decisions lightly, and you should examine your own economic circumstance before you sign anything.
No debt? Then invest!
The sudden plateau in interest rates is great news for anyone looking to invest some money. Yes, I know, right now interest rates from banks on term deposits and savings are appalling. However, if you invest in managed funds that invest in the share market, you'll be ready to ride the rise when it inevitably comes. It's easy to get blindsided by short term economic events, and this recession we're not really having is one of them. But be aware that inevitably, a rise will come, and to make the most of that rise, you need to be investing your money when the markets are at a low point. See a financial planner for advice and start changing your life now.
Change your life a few dollars at a time
So, before rates go back up, you should take a few minutes to make the most of this opportunity. Firstly, if you can spare even $2.50 a week, you should be putting extra on your home loan. Every dollar you put into your loan now is going to save you more time and money later, when rates inevitably go up. If you haven't got a home loan, but you have other loans (like credit cards) then you should be taking this fantastic opportunity to crush your debt. Every cent that goes on a loan right now takes a bigger chunk out of the principle than it will later, because it's not going towards a gigantic interest bill.
We might never get interest rates quite this low again in our lifetimes. It is a fantastic opportunity over the next few months to make a big impact to your financial well-being, if you crush your debt and invest for your future. Don't let it slide.