Rates are low and fixing's fine but a mix is even better

Is now a good time to lock in a fixed-rate mortgage? It's a question that's received plenty of attention this year, after the Reserve Bank cut official interest rates to their lowest level on record.

If you'd fixed earlier in the year, such as in June, you may have locked in a rate at a time when borrowing costs had further to fall.

So how can you tell if fixed rates have really hit bottom? The honest answer is that no one knows for sure.

It's impossible to say with certainty that we've reached the low point in fixed interest rates, because they are influenced by Reserve Bank decisions, which are in turn influenced by what's happening in the economy. So unless you have a crystal ball, there's no way to be sure of what the Reserve will do next.

There are, however, growing signs that fixed interest rates are probably going to rise. Many borrowers seem to think so. Broker AFG says 27 per cent of loans it arranged in October were fixed, well above the long-term average. Perhaps more importantly, the prices being offered by banks also suggest most fixed rates may have bottomed.

According to Canstar, the average rate on a three-year fixed mortgage has edged up to 5.14 per cent, compared with 5.1 per cent at the end of last month. It's a similar story for two-year and five-year fixed-rate loans.

Why are these rates rising? Fixed-rate loans reflect market expectations for official interest rates that the Reserve Bank sets, so when the financial markets think official rates will rise, fixed rates also rise. That's what's been happening lately.

Economists and financial market commentators think the Reserve Bank's current cycle of interest rate cuts is finished, because the economy is recovering.

What's more, they reckon the Reserve Bank will be unlikely to make any more rate cuts when house prices are rising so quickly, for fear of stoking a bubble.

So for what it's worth, the financial market community seems to think most fixed-rate loans will get more expensive.

If you are thinking of fixing, it's important to be aware of the risks. The biggest one is changing your mind if something unexpected happens with interest rates.

Depending on the size of your loan and market conditions at the time, the cost of cancelling a fixed-rate home loan can be thousands of dollars, so it's not a decision to be taken lightly.

Advisers suggest one way to minimise this risk is to fix part of your home loan, rather than the whole lot.

What to do?