To fix or not to fix: that’s one of the crucial questions facing property investors as economists tip a new round of rising home loan interest rates. We examine the pros and cons.

The debate about fixing or floating interest rates has been given new urgency by official statistics showing ballooning levels of personal debt. With mortgages at an all-time high, even a small rate rise could cause widespread pain for home owners and investors.

But hindsight is a fabulous thing. Even the experts have trouble picking the top and bottom of the interest rate cycle. The decision to float or fix, therefore, should be taken after careful consideration.

Timing the highs and lows

Analysts say those hoping to fix their loan at the lowest point of the current cycle have probably missed the boat. This is because while variable interest rates have remained stable at near historic lows for more than a year, fixed rates have been much more volatile.

Fixed rates reached their lowest point earlier this year at precisely the time economists were predicting further cuts to official interest rates. In mid June, the average fixed rate for a one to three-year loan term was 5.82% per annum. Fixed rates were looking pretty competitive.

Then in August the Reserve Bank of Australia (RBA) signalled a reversal in rate policy and money markets immediately began pricing in higher fixed rates. Over the past three months, fixed rate loans have risen by between 25 and 40 basis points (0.25 to 0.4% p.a.).

However, the gap between fixed and variable rates remains comparatively narrow. In the past, fixed rate loans were up to two percentage points above the variable rate. Today, that gap is virtually non-existent with ANZ’s Standard Variable Rate of 6.82% p.a. on par with the three-year fixed rate of 6.95% p.a..

Reasons to fix or float

Greg Bussell, Product Manager Residential Investment Loans and Equity Lines, says security rather than rock bottom rates is the key reason investors choose to lock-in.

“The major advantage to fixing your investment loan is that it gives you certainty of repayments for a set period of time. That can be particularly useful to investors as it helps with budgeting and ensures cash-flow is consistent.”

“What borrowers are trading off is reduced flexibility in the loan. Fixed rate loans can come with limits. If you do want to make extra repayments, or pay off your loan during the fixed rate period, you could face early repayment costs. There is also limited ability to link to an offset account and you may find the loan lacks features like redraw,” Mr Bussell says.

What to consider

1. What would be the impact of a rate increase on your ability to service the loan? How would this impact on cash flow? How much would rates have to rise by to cause pressure or difficulty in meeting the repayments?
2. What is the economic outlook? Is the outlook expansionary, in which case higher official interest rates are more likely? What is the state of the property market? Are your job prospects stable and strong for the foreseeable future?
3. Using past rate cycles as a guide, calculate whether it was better to fix or float over one, three or five years. At what point in the cycle would it have been better or worse to fix.

Ultimately, many investors choose to have a bet both ways by fixing part of their loan and floating the other part. And remember, there is no single correct choice for all borrowers. The right decision comes down to your individual needs, preferences and risk profile.

Want to find out more?
See where rates are headed
Read a summary of the ANZ Economic Outlook report.