Here is a exceprt from my Sept newsletter - I had a financial planner crunch some numbers ( prior to last 2 rate rises) so data a little old but still interesting, to put it in perspective th Westpac professional 3yr fixed is now 7.39% and 5yr fixed 7.74%
To fix or not to fix…that is the question
Fixing interest rates can be a vexing dilemma at any time, but never more so than now. Katrina Gay from Nicholson Financial Planning has put a lot of time and effort into working through this complex question and I’d like to give you the benefit of her expertise:
Katrina says: “I have started to received quite a few queries from clients about whether to fix their interest rates. There is no doubt that interest rates will go up in future, but this doesn't necessarily mean you will be better off fixing your rates.
As many of my clients have Westpac professional package loans, I have used the current Westpac fixed rates in the examples below.
The current Westpac three year fixed professional pack rate is 6.79% pa. If you were to try and beat the variable rate by fixing now at this rate, you would have to believe that the average interest rate over the course of the three year period is likely to be higher than 6.79%. If, for example, we use a steady, straight line interest rate increase, then to break even with fixing at this rate, you would have to see discounted variable rates rise from 5.11% (current) as
follows:
- to 6.21% by Aug 2010
- to 7.31% by Aug 2011
- to 8.41% by Aug 2012
So in order to profit from fixing your rate for three years, you would need rates to rise by an average of 5 lots of 0.25% each year over that time.
Using the current Westpac five year fixed professional pack rate of 7.44% pa, and steady, straight line interest rate increases, then to break even with fixing at this rate, you would have to see discounted variable rates rise from 5.11% (current) as follows:
- to 6.06% by Aug 2010
- to 7.01% by Aug 2011
- to 7.96% by Aug 2012
- to 8.91% by Aug 2013
- to 9.86% by Aug 2013
So in order to profit from fixing your rate for five years, you would need rates to rise by an average of 4 lots of 0.25% each year over that time.
If you think that it is highly probable that rates will be higher than the figures above at those points in time, then you have a good argument for fixing. But, as with the share market, nothing is certain, so I personally prefer to keep all my loans variable. Looking historically, it is more common for people to lose rather than win by fixing their rates."
Thought it might be interesting for the debate. Obviously it is up to the individual to decide what fits their circumstances and risk profile.
Hope this helps
Jane