To Fix Or Not To Fix| Property Investment

By Helen Collier-Kogtevs | www.realwealthaustralia.com.au | Submitted February 09

To fix, or not to fix? Your mortgage interest rate, that is. This is one of questions I’m being asked most frequently at the moment – and the answer, as with all decisions to do with property investing, depends on your situation.

Interest rates have plummeted to levels we wouldn’t have dared to dream about this time last year. The official cash rate has been slashed from 7.25% in May 2008 to 3.25% today, so the real interest rate most mortgage-holders are paying has dropped from around 9.5% to 5.5%. On an average $400,000 mortgage, that’s a whopping saving of $1,330 per month, before depreciation and tax are taken into consideration.

With the memory of interest rates just shy of 10% fresh in our memory banks, many investors are now tempted to lock in these low rates for as long as possible. I am definitely not opposed to the idea of fixing your interest rates, however, I would encourage you to consider a few key points beforehand.

The first and most important thing to realise is that lenders are all about profit. They don’t offer a low fixed rate to be nice, or because they want to be competitive against other banks – they do it to lock in your business for a set period of time. They’re not actually selling you a fixed rate, they’re selling you stability and security. If you decide to fix your rates, be aware that you may end up paying a premium for that comfort.

If you fixed your rate in July 2007, you would have secured a 3-year rate of around 7.4%. When the RBA raised rates by 25 basis points in August, and again in November, you’d have been quite pleased. Two more rate hikes followed in first quarter 2008, coupled with various lender-imposed increases, so by April 2008, you would have been patting yourself on the back for fixing when you did.

Fast-forward nine months, and the average mortgage holder is paying around 2% less than you. While the security of your fixed rate bought you comfort in the beginning, now you’re paying for it.

Having said that, the market is very different today, and even though interest rates are likely to stay low for a protracted period of time, they will eventually begin to track upwards again. When they do, the incredible fixed rate deals that are on offer at the moment will quickly vanish.

Also, while the RBA is pegged to deliver more rate cuts in the coming months, there are no guarantees that the banks will pass them on to customers. In fact, some banks have already said, point blank, that they won’t pass on the next rate reduction.

If you’re keen to lock in a fixed rate, you may want to consider doing it now. The last time I fixed my rates was when the five year interest rate was 5.99%. I have not seen rates this low since. There are some lenders that are offering 10 year fixed rates as low as 6.19%.

Before you take the plunge, however, consider every possible scenario that could occur, no matter how unlikely – for example, you or your partner losing your job, one of you becoming ill, starting a family, caring for an elderly parent, etc.

All of these factors can impact your income and lifestyle, and a fixed rate could either make things worse (if you’re forced to sell an investment property, breaking your fixed rate will cost you dearly) or could make things better (if you plan to have a baby and reduce your income, a fixed rate may help you plan your budget more effectively).

In general, I like it when fixed rates are this low however just make sure that your decision is based on your own personal situation – and consult a finance and lending professional before you sign anything.