The few who should be opting for fixed rate mortgages are those with relatively large mortgage payments relative to their income who have the most need for certainty of outgoings, he says.
But everyone else should just forget it and stick to floating rate mortgages.
That’s because now the Reserve Bank has inflation much more under control than it did in the early 1990s, the peak in interest rates will be much lower than previously. In that environment it’s hard to make substantial savings from fixed rate loans and, in fact, most people on fixed rate loans will end up paying more than if they were on floating rates, Cairns says.
The Reserve Bank may well raise its official cash rate another percentage point or so from the current 5.25% level, but it won’t go much higher than that. What’s more, the expected rate rises are already factored in to fixed rate mortgages, he says.
Cairns Lockie is currently offering a 6.8% variable rate home loan and an 8.1% two-year fixed rate loan.
"If you fix for two years, from day one you’re paying 8.1% but it might take six months for the variable rate to go to 8.1%," Cairns says.
And after that, "if you’re on a floating rate and the economy starts to ease (and the central bank does too), you will get the interest rate relief immediately," he says.
There are other drawbacks to fixed rate loans such the penalties you have to pay if you sell your house within the fixed term.
The other day, he had a couple with a joint income of $100,000 and a mortgage of $100,000 asking about fixed rate loans. "What’s the point. They may as well take the risk," Cairns says.
