To fix or float? 5 questions to ask before you decide

Luke Parker
To fix or float? 5 questions to ask before you decide

Interest rates are only tracking in one direction: down.

With so much change going on in the market, home buyers and owners looking to refinance have some tough questions to consider: Do I fix? Do I float? Do I wait a bit more? Do I risk it and just take a punt? 

Laurie Wills, experienced mortgage broker and founder of Awesome Mortgages, says unfortunately knowing whether to fix or float is not a perfect science.

Laurie Wills Awesome MortNo magic formula

“There’s no formulaic approach," Laurie says. "You can’t say interest rates are tracking in this direction or that direction, house values are tracking in this direction, so this plus that equals fix for 2 years. It really comes down to each individual’s unique situation.”

He believes it’s a combination of looking at economic indicators, like what’s the Reserve Bank doing and what’s happening to the domestic and international economies which will all have an impact on interest rates.

“But also, the wild cards are buyer behaviour and banking competitive pressures.”

SEE ALSO: The 5 basics of property investment

The mortgage specialist says you don’t necessarily know you’ve made the right decision until the end of that fixed-rate period.

“Then you can look back and see how it panned out based on where the market’s sitting at that point in time. You may find that having fixed earlier at a slightly higher rate has advantaged you at the end of the journey.”


Making a decision – food for thought

Laurie, an experienced mortgage advisor, believes it should always come back to cost certainty.

“How much peace of mind do people really want and what kind of cost certainty do they want? It’s very easy, and we all do it, to get caught up in that sort of trap of trying to save money through fixing. I get this is human nature, but I think we need to be careful that you don’t get caught up in that and really lose sight of the real reason why you should be picking, which is cost certainty.”

One of the biggest considerations for people right now, Laurie says, is how they will feel after they fix and there’s a further downward movement in rates.

He says that he sometimes sees people get to the point where they’re waiting, waiting, and waiting for the perfect rate, but it costs them in the long run.

“People wait, knowing there’s another potential OCR cut coming up. Suddenly they’ve sat for 2 or 3 months and nothing’s happened – in that time they could have already shaved a fair bit off their rate if they’d fixed earlier.”


The OCR and interest rate movement misconception

From an advisor’s perspective, Laurie sees part of his role as educating people around how the OCR works.

“Whenever there’s an OCR movement, I get this flurry of calls from people asking what the 2-year fixed rate is doing now. Well it doesn’t necessarily work that way.”

He says the general OCR movement will affect floating rates but won’t necessarily impact on fixed rates.

“But the public are conditioned to believe, for whatever right or wrong reason, that whenever the OCR goes up or down, that interest rates across the board are going to move.

“Sometimes I wonder whether there’s more of an artificial market evolving just purely because of competitive pressures between the banks rather than what you could link or explain as a result of the OCR movement.”

Pull out quote Laurie Wills

Everything is cyclical

For those new to the world of mortgage rates, Laurie says it’s important to understand that interest rates will change.

“Everything is cyclical. Interest rates will rise again, it’s just a question of when.

“If I was a first home buyer in the current market and I didn’t have a lot of equity, I would probably be favouring fixing longer than shorter, because the rates are very, very affordable.”

For first home buyers with less than 20% deposit and paying a low equity margin on their rate, Laurie says another consideration is looking at the potential to reduce their debt or increase their equity through a shorter fixed period and then going on to get a better interest rate for a longer fixed period.


Will rates stay low?

Laurie says his personal view is there’s nothing particularly scary on the horizon in the short to medium term, and by that he means the next few years.

“For me, the sweet spot now is really a 6-month or 12-month fixed rate term, but that’s as long as you’ve got some wriggle room if rates un-expectantly hike.”

But again Laurie puts a high value on peace of mind, saying, “People sleep easy at night if they’ve a 2 or 3 year cost certainty.”

That being said, “Other people will just naturally want to play the market and take a bit of a punt.”

SEE ALSO: The 5 basics of property investment

Laurie’s 5 questions to ask yourself when deciding to fix or float:

  • How much certainty and peace of mind do I want? What impact will any interest rate rises have on my lifestyle and ability to meet my financial commitments?

  • How much flexibility do I want? At the end of the day, the rate that you pay is important, but your rate of pay is more important. So you want to be careful not to limit your ability to pay extra.

  • Is there a possibility that I might be going to sell in the short to medium term? If this is the case, you definitely wouldn’t be fixing.

  • Am I looking to take on board debt like additional property? It would be wise to try and forecast out and really consider what your needs are.

  • How am I going to feel if I don’t fix and then the market turns? How am I going to feel if I do fix and the market continues sliding down? 

Looking for a new home? 

Westpac has handy tips, info and mortgage calculators to help:


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