Interest Rate Cuts – Is It Better To Fix Or Stay Variable?

At the RBA meeting yesterday it was announced that interest rates would again be cut (following a 0.25% drop in October), by a further 0.25%.  The cash rate is now sitting at just 3%, the same as at the peak of the global financial crisis in April 2009.  This got our team at Professionals Mudgee Real Estate thinking, what does this mean for the average Mudgee home owner?

Lower interest rates generally mean it’s a great time to buy; borrowing is easier and your mortgage interest will be lower and more manageable.  But beware, this is not the time to go overboard and purchase a property far above your means.  Don’t make the mistake of thinking that a drop in interest rates now means you should start looking up into higher price brackets.  Buying within your means will ensure you don’t get caught out trying to pay off and maintain a huge house you can’t afford if the interest rates rise again in the future.

If you’re already in the property market, you may like to view the rate drop as an opportunity to get ahead and start reducing your debt.  If you’re managing to make your mortgage repayments easily enough now, why not continue paying the higher rate?  It’s easier than calling up your financial institution and asking to pay the new minimum payment; simply ignore the rate cut and you won’t even notice that you’re creating a gaping hole of equity and paying off your mortgage much sooner.

According to mortgage advisor Jason Khoury (from iChoice Concord), most Australians tend to keep their mortgages on variable terms for as long as they can afford to, hoping to reap the benefits of any cuts that are made.  While it is still uncertain as to which banks will pass on yesterday’s cut, and how much of it they will choose to pass on, there are currently some very attractive 3 and 5 year fixed rates on offer if you (or your broker) are willing to hunt around.

The main benefit to fixing interest rates is security.  If you believe it would fall somewhere in the range of ‘tricky’ to ‘impossible’ to pay off your mortgage if rates were to increase by 1 or 2 per cent, you may sleep easier at night knowing you’re locked in at an affordable rate.  At the end of the day, if you come out of your fixed loan period to discover that in fact you would have been better off staying variable, at least you know that you didn’t waste any time or lose sleep worrying about the affordability of your home during that time.

Naturally, if you are easily affording your mortgage repayments every month, you may prefer to stay on a variable home loan for now.  The variable rates are generally lower than fixed, and while your rate is likely to face increases you will also get an immediate benefit from rate cuts as well.

Our team at Professionals Mudgee Real Estate would love to help all home owners and buyers alike.  If you are in the market to purchase your own slice of Mudgee real estate, we’d love to hear from you.

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