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To fix or not to fix

With the stock market starting to look like it has gone positive again, it’s time for stretched home borrowers to ask the question: “Should I fix my interest rate?”
In the past week I have had about half a dozen people ask me the question and it is the question I hate the most.
And it is a double-barrelled tough question because the second part goes like this: “And for how long?”
To answer the questions you have to really know the debts, income, expenses and other circumstances of the borrower. Plus you need to know their risk profiles - thrill-seeker or nervous Nellie? And you have to know their goals.
Let’s make it simple and say you want to minimize loan repayments and not cop another two 0.25 per cent rises on your home loan interest rate.
Start with what you are paying now and find out if it costs you anything to break your current loan. One of the best two-year fixed rate on the website was 7.49 at Onedirect.
One of the best 3-year rates was 7.24 per cent at Meridian Money but with other costs its real rate was 7.56 per cent.
(Always find out what the true rate is by adding in the fees. Websites such as Infochoice and Cannex show you this.)
Okay, will interest rates rise over the next year or two? There’s a good chance and inflation will be the key.
Before the stock market problems many economists thought another rise this year was on the cards. With the Yanks likely to cut interest rates in September, after cutting a rate used for banks borrowing from the American central bank, there is less support for another rise here this year.
Gail Kelly, the St George Bank boss heading to take over the top job at Westpac, this week said she thought interest rates would stay where they are this year.
She could be wrong but she wouldn’t say it if she thought it was a long shot. Also the cash rate of interest at 6.5 per cent is at an 11-year high.
And elsewhere plenty of economists think we are close to the top of the interest rate cycle. That means one or two more rises could happen but that should be it.
Personally, I think two more rises, with incomes stretched to meet very high debt repayments,  would create a recession and bring about interest rate cuts.

Talk to your banker and some mortgage brokers for a view on the subject and best of luck with your decision. 

Published on: Saturday, August 25, 2007

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