To fix or not to fix: my prediction on rates

To fix or not to fix: my prediction on rates

So we are getting toward the lower end of the scale with home loan interest rates and a lot of people out there are thinking whether they should fix their rate or not.  In this blog I intend to give some information that will help readers make a more educated decision, also I will give my opinion on what will happen to interest rates in the next year or two. 

The first thing I see people do when it comes to fixing is hold out for the lowest rate, this can be tricky because none of us have a crystal ball and can predict the future.  Holding out can be a trap because if the banks see the economic trend changing they will increase their fixed rates without any notice, once this happens people do not fix because in their mind they are losing money as they missed out on the lowest rate.

If you hold out for the lowest rate then essentially what you are doing is gambling, if you are ok with gambling then that’s fine but for many people it has the potential to eat at them and consume them.  If you want to get out it can cost tens of thousands and therefor you are trapped.  If you are a person that will try save the maximum amount through fixing remember; the dealer always wins.

Instead what you should be doing is measuring up if you are happy with the rate, it will give you certainty with managing your finances because the cost will be fixed every month and you will be content with your decision no matter what happens to the rates. 

I get asked if now is a good time to fix all the time, all I can say that is in recent history the current rates are relatively low and that if you make a decision be ok with it understand if you want to get out you could be up for some large exit fees.

What is going to happen to rates?

In the past interest rates have been lowered because the government has high debt.  Lower interest rates allows the people to borrow more and therefor spend more, more spending is what grows our economy and allows the government to take higher taxes and pay off government debts. 

Unfortunately now we have a record amount of consumer debt (the combined debt owned by individuals), this means we can borrow less and more money will go to saving and repaying debt rather than spending to improve the economy.  What does this mean? It means the government will find it harder to reduce its debt and our economy will struggle to grow.  I believe the rate will be kept low until the economy starts to show some signs of recovery.

With industries like manufacturing, tourism and retail just to name a few all going backwards I find it hard to see the economy recovering any time soon.  These jobs are all being off-shored or going online, less jobs means less money for people to spend and it means the economy will take time to improve.  With this in mind I don’t see rates growing for at least another 18 months.

Am I right? Only time will tell.  I would love to hear your thoughts or questions on the issue, I will respond to all comments.