Timing is everything when it comes to fixing your mortgage

There has been a great deal of movement in fixed rates over the last three months, and for some borrowers fixing has become the "new black".  It’s easy to understand why borrowers are being tempted, particularly with some three year rates sitting well below the 5.5% mark.

Generally speaking most borrowers are motivated to fix their loan balance for one of two reasons.  To create repayment certainty and stability, or, to beat the market at a rate that will be consistently lower that their standard variable for a fixed period.

And when fixing a rate, there is no denying that timing is everything.

Those looking to beat the market often wait until they can establish that fixed rates have reached their lowest point in the current cycle – but because rates can change very quickly, they often miss out.

Over time the fixed versus variable conundrum has continued to present a challenge to borrowers curious about whether fixing will deliver a cheaper result over time, and this is most prevalent when interest rates are in a downward cycle.

The majority of borrowers, however, are generally content to remain with their standard variable arrangement, thereby retaining all the flexibility and features a fully optioned loan delivers.

Even though the average standard variable rate of the big four banks is around 6.62%, most existing standard variable rate borrowers are sitting around 20 basis points either side of the 6% mark.  And with variable rates tipped to fall further, the temptation to lock in is growing.

This is where the split loan option of part fixed, part variable becomes the popular alternative, offering the flexibility of a variable loan with the payment certainty of the fixed arrangement.

This option is fast becoming the borrower preference over 100% fixed, with most lenders offering attractive fixed/variable combinations aimed at borrowers wanting the best of both worlds.

Over time, however, traditional fixed loan arrangements have become more flexible in their own right – with additional repayments allowed for most products.  But that being said, borrowers often overlook the additional criteria that applies to breaking fixed loans during the term.

It is therefore incredibly important that borrowers read all of the terms and conditions associated with the fixed loan arrangement. Because if, for example, there is any chance that the borrower may need to sell the property or break the loan while during term, he or she might be better off to remain on a variable arrangement, as those costs can be prohibitive.

In terms of what we see happening at the moment, the most popular fixed rate period still remains the three-year option. However shorter terms are also becoming a popular choice, given rates are on a downward trend.

Only during the last week, we have seen one-, three- and five-year rates stabilise with a slight increase in some bands, so I don't believe we can assume that fixed rates have bottomed out just yet –  this will only come as they stabilise.

My suggestion therefore is that if borrowers are looking for a better deal – whether it be fixed or a split arrangement – they may want to approach their lenders first to minimise their costs of refinancing, or do their research and find the right combination for them.

But remember, a good and efficient loan arrangement is not simply just based on having a low rate.  Features, flexibility, fees and the right guidance are just as important.  You want your rate to be competitive – but above all, you want your loan to work for you.

Lisa Montgomery is CEO of Resi Mortgage Corporation