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To fix or not to fix? Australia's top interest rate expert says not

To fix or not to fix? It seems to be the question on lips across the nation, with fresh fuel thrown on the fire by the Reserve Bank’s refusal to rule out more rate cuts down the track.

So, just how low can interest rates go?

When Peter Switzer spoke with the country’s foremost expert on interest rates and the brains behind consumer rate tool Canstar Cannex and Rate City, Andrew Willink, on Sky News Business Channel, he tipped lower still.

Lock it in, Eddie?

While many savvy consumers will try and lock in rates at what they believe to be the lowest point of the cycle, Willink warns consumers to think twice before committing to a fixed rate, even now.

“We’re at the bottom of the market in terms of the cash rate, but we’re certainly not at the bottom of the market in terms of the fixed rates,” says Willink, adding that banks are factoring the difficult credit markets into their fixed rates and as such, they have the potential to fall further.

There is also a danger in the misplaced confidence in those who believe this is as low as the banks will go.

“You’ve got to think about what’s happened over the last 12 months with interest rates,” explains Willink. “A lot of people have suffered enormously by having chosen a fixed rate 12 months ago, having paid eight per cent and then find that within months the rate dropped by four per cent. So the consequences of fixing are enormous.”

Pay now, save later

Willink says a safer option is to go with a variable, and pay it at a fixed rate – by accelerating your payments, you can effectively reduce the time, and interest paid, on your loan.

To prove his point, he compared a five-year variable loan making the standard monthly repayments to a five-year variable loan with extra repayments.

On a $500,000 loan at the variable rate of 5.26 per cent, the monthly repayments are $3000. The term to repay, at this rate, would be 25 years. But if you opted to pay an extra $300 a month (making the monthly repayments $3300), not only would you shave your term to repay by 50 months, but you would save a staggering $76,365!

Last word

  • When shopping for loans, ensure you compare like with like.
  • When making a choice on a loan, consider the fees and charges.
  • If you opt for a variable loan, consider upping your regular payments to reduce both the time and interest paid on your loan.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, July 23, 2009

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