Market signals favour fixing

Look sharp - we now have green lights on all three of my conditions for commitment on your mortgage, for locking in a fixed rate.

First, a loan land-grab has lenders falling over themselves to offer better deals; those to do so recently include CBA, NAB, Westpac and ME Bank, and data researcher Mozo says 59 of 75 providers have reduced their rates in the past two months.

When they're all putting their best feet forward is when you'll secure the best rate.

Second, this competition has pushed fixed rates well below variable ones - and it's vital to make an immediate saving if you run the risk of later paying over the odds.

Exclusive research by Mozo for Smart Investor Money reveals the average one-year fixed rate is 60 basis points below the average standard variable rate of 6.43 per cent and the average three-year fixed rate is 57 basis points below it. This is more than the two rate-cut buffer I like to apply. However, the average five-year fixed rate is a mere one basis point below the average standard-variable rate, so not nearly as compelling.

Over one year you'll get the lowest lock-in with V Plus Home Loans's Advantage Fixed (5.49 per cent), CUA's Fixed Home Loan (5.5 per cent) and My Mortgage Freedom's Fixed Rate (5.54 per cent). Similar names come up over three years: again V Plus Home Loans's Advantage Fixed (5.49 per cent), My Mortgage Freedom's Fixed Rate, and Reduce Home Loans's Fixed Loan (both at 5.54 per cent).

If you're looking at five years - and heed my warning below if you are - check out Greater Building Society's Fixed Rate Ultimate (5.95 per cent), Westpac's Fixed Options (5.99 per cent) and, once more, Mortgage House's Advantage Home Loan (6.19 per cent).

As variable rates have stayed static in the past few months, the margin between fixed and variable rates has increased. There are some great offers around.

Bear in mind, though, this is not the cheapest fixed rates have been, relative to the cash rate. That shrank to as little as 195 basis points last September on three-year rates, for example, which is now a more expensive 236 points.

In any case, my third criterion for entertaining a fix is that there needs to be a forecast for rates to fall - and the market and many pundits are predicting four cuts in the next year.

The time to fix is when official rates are expected to go down, and so fixed rates are low, rather than when they're expected to go up, when the institutions' offerings are creeping skywards.

Of course, what you want is the experts to be wrong - stranger things have happened - and for rises to begin precisely as you ink your dirt-cheap deal.

But I have a confession to make about all this: I acutely dislike fixed rates.

Etched into my mind is many a difficult conversation when we were just into the financial meltdown with readers whose discomfort at the previous, seemingly unending, rises had caused them to fix at the top of the interest-rate cycle.

"What can I do?" they pleaded as mortgage rates fell to as low as 5 per cent while they were stuck on 9 per cent-plus. "Very little," came my regretful reply.

When you commit to a fixed rate, you make a contract to pay that interest amount for that period. Break this deal and the penalty - even in the era of no-exit fees - will virtually equal the promised payment.

Essentially, a fixed rate is taking a bet against the bank that they and their team of number crunchers have priced it incorrectly - and, more often than not, it wins at the expense of its customers.

That's why my advice is never to fix more than half your mortgage. Never fix for more than three years, either.

Interest rate expectations can change in a heartbeat, and it's plain dangerous to commit for any longer.

You need to also consider the enormous drawback to fixed rates: you can't make extra repayments. Regular readers know one of my top wealth-creation tips is to remortgage with a lower rate and then keep your repayments at their previous level. The interest savings quickly mount to thousands and the time savings to years.

Yet if you see your minimum monthly repayments fall because you fix, you can't make use of that saving to cut your ultimate interest bill.

Of course, what you lose in flexibility, you gain in security.

The main risk you face by fixing now, however, is that rates will drop even further and you will have to sit for years trapped on a higher rate.

Perhaps the smartest strategy is to watch and wait a while and then, if stability of repayments really is key to your situation, lock in just a portion.

Nicole is the editor of afrsmartinvestor.com.

Follow her on Twitter @NicolePedMcK.

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