To Fix or Not Fix - That is the question!

Tue, 10 Nov 2020

To Fix or Not to Fix That is the question!

After the RBA's announcement on Melbourne Cup Day that it was cutting the cash rate to the lowest in Australian history, we've now seen a number of lenders offering fixed rates below 2% for a period of 4 years and many are jumping into these options right away. However, we would strongly encourage you to carefully consider whether this is the right decision for you to immediately take.

If you were to predict that rates were going to be this low 12 months ago, you may well have found the men in white coats knocking on your door. They also would have said you were crazy had you suggested a worldwide pandemic was about to hit, causing global economic disruption, shutting down global and even local travel, let alone the sadness and grief for countless numbers of families. You'd also have been tagged a bit off centre, to suggest that WA would be one of the only places in the world to achieve positive economic growth during this dark period in our modern history.

For many years, WA has experienced a decline when our cousins on the east have seen growth and vice versa. But now we are in completely unchartered territory and all the previous economic models are being tested. Whilst we are experiencing growth in many sectors of our WA economy, the majority on the east coast are not. As it always does, the RBA will continue to make decisions that are based on the performance of the entire country and it will be some years before Australia pulls itself out of the economic destruction that has been caused by the pandemic. As we move forward over the next few months we believe there's a few other factors for you to consider in your decision to fix now, or perhaps wait a little while before locking yourself in.

  • Jobkeeper and the small business cash boosts were the saviours for many businesses, but the boosts have now finished and Jobkeeper will taper off by March 31st. We won't know the full effect of the withdrawal of these boosts for some months into 2021.
  • Special Term Funding Facility - The RBA announced in September it was increasing the limit on its special term funding facility to $200Billion. This provides lenders the opportunity to access funds from the RBA at 0.25%, fixed for 3 years. They have until the 30th June 2021 to access these funds and it means they will be able to provide cheaper funds to clients until at least June 2024. We don't know whether the variable cash rate will remain at 0.1% for 3 years, but we can rely on the lenders locking in that 0.25%.
  • Home Loan Payment Deferrals - more concerning from a housing perspective, will be the finishing of the lenders payment deferral schemes. No action has been taken against borrowers at this stage for needing to defer their payments. But this cannot continue long-term and many borrowers may find themselves needing to sell their homes, or worst still the lenders taking action to recover losses.

When some lenders brought out fixed rates of 2.19% for 2 years earlier in the year, this almost led to a frenzy of clients jamming the banking systems to lock these rates in. 6 months on, clients are now seeking advice from us on what the break costs are for these loans, to now refix at the lower 1.99%. This can be a very costly exercise.

We are suggesting taking a big breath right before jumping into fixed rates. We've learnt how rapidly the financial landscape can change even in just 6 months, so we would caution against making a rapid decision because of the hype and excitement caused by rates all of a sudden dropping below 2%. We believe now is the time to take a step back and have a measured approach to your full position as we head into Christmas and the New Year. There's an extreme amount of financial fatigue in the housing market right now and borrowers are concerned and confused about what direction to take.

Sometimes, the best action is to take no action.

Our advice on the best action to take right now is to make an appointment to understand all the options available for you and your family.

Don't hesitate to contact us on 08 6555 6565 or if you'd like to discuss further.

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