I have received dozens of calls from clients in the last 2 months.  All asking the same questions: “Have interest rates hit rock bottom? Should we fix our home loans now?’.

In recent weeks the frenzied activity around fixing rates has almost reached swine flu hysteria like proportions.

Yes, interest rates have gone as low as they are likely to go. But fixing now may not be the best action as whilst variable rates remain at historical lows, fixed rates have already gone up.  There is now a considerable gap between the current variable rates (5.03-5.21% pa var) and the fixed rates (6.5-7.9% pa for 3-5 years fixed).

With fixed rates being between 1.3-2.87% above the variable rates, borrowers will pay a huge premium for the certainty and security that fixed rates offer. More over, variable rates will need to go up by double this difference (margin) over the given fixed term for the borrower to simply be on the same footing as they would have been had they remained on the variable rates. 

Put simply, if variable rates do not go up by3-6% over the next 3-5 years it is unlikely that fixing your loan will save you money.  So fixing your home loan is not the smart play that some think UNLESS you expect a financial tsunami that sends rates spiraling up at a speed and for a duration that we have not seen before.

So my advice to clients has been, only fix if the thought of a 2-3% interest rate rise (over any time frame) gives you sleepless nights. And you will not mind that you may pay more over the fixed term in return for the security of knowing that your repayments are locked in and cannot move.

BUT if you decide to not fix, that should not be the end of matters.  Whilst variable interest rates are low, they will rise (see Rapid fire rate rises unlikely for the experts predictions on rates). So what should we do to deal with this?

Here is my recipe to getting ahead and saving thousands on your home loan.  Starting today, set home loan repayment as if interest rates were 2.5% more than the actual rate is.  So more or less make repayments as if the interest rate was 7.5% pa.     

Taking this step will produce 5 valuable outcomes for you:

1.             You will be making substantial additional repayments. So you will be getting ahead on your home loan and this will save you big money if you continue to do this long term.

2.             Setting repayments at this rate proves to yourself that you can do it. So as rates rise, you will not fear the impact that the rate rises will have on your ability to meet your home loan commitments.

3.             If rates go even higher than 7.5% and you do find making ends meet tough then you will have a reserve of additional repayments you can call on to help you make ends meet

4.             Being ahead on your home loan will be looked on favourably if you lose your job or have some other mishap and need to ask your lender for a repayment holiday.

5.             Your minimum loan repayment can be re-negotiated if you prefer to reduce your loan limit rather than keep the additional repayments in the loan available for redraw. This is another way to deal with rate rises.

So I encourage everyone to take advantage of the low rates by accelerating your loan repayments and getting ahead. It is both insurance against rate rises and the best strategy for saving tens (and even hundreds) of thousands of dollars over the life of your loan.