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The best time to gamble on a fixed loan

Wednesday, 5th Feb 2014

Finance Tile

When is the best time to bet on a fixed-rate loan and potentially save yourself thousands?

There is speculation that interest rates have bottomed out and that the next RBA movement will likely be to increase rates. Does that make it a good time to choose a fixed-rate loan?

Personal circumstances and preferences should always drive the decision to fix your loan, and you should discuss the pros and cons with your broker before doing anything.

But putting aside the relative differences between a fixed and variable loan, what’s the best time to ‘bet’ on a fixed-rate loan and potentially save money?

People naturally think about fixing when variables rates start to increase, but if you wait until then, you’ve almost certainly left it too late to get a good deal on a fixed-rate loan. If lenders expect variable rates to increase (due to an increase in the cash rate or other factors), they will inevitably price their fixed-rate loans accordingly, eroding any potential gain.

Clearly, the ideal time to lock in a rate is before variable rates start to increase, while fixed-rates are still relatively cheap.

While comparing current fixed and variable rates is a useful tool in deciding which way to go, you really need to compare fixed rates and consider what you think variable rates will be throughout the period of the fixed term. This is obviously a much more difficult proposition and highlights the gamble involved with choosing a fixed rate.

Theoretically, even if fixed rates are similar to, or higher than variable rates, it could still be beneficial choosing the fixed option if variable rates increase substantially during the term of the fixed-rate loan. However variable rates may have to increase substantially before you’ll save with a fixed-rate loan.

Choosing a fixed-rate loan is always a bit of a gamble. You should make sure that you intend to be in the loan for the period of time you are fixing (given that there can be substantial penalties for early exit). If you prefer the comfort of certainty in your loan repayments and rates are towards the lower end of a normal range, then fixing may be a good strategy for you.