The Good.

The good news? Rates probably aren’t going to get a lot worse!

Most economists predict that we have reached the top of the interest rate cycle, which is something to celebrate. Of course, we can't accurately predict the future but, if this turns out to be true, the key issue is estimating when rates will start to drop.

This is important when deciding how long to fix your interest rate for.

If rates are expected to stay at current levels for a year, then fixing for 18 months may be the perfect choice. However, if the economy worsens significantly and inflation plummets, there's a chance that rates will drop before then, making fixing for 1 year a smarter move.

The Bad.

The bad news is that if you are about to refix your loan, the interest rate will increase from 2%, 3%, or 4% to around 6.5%, and this will be a significant change. Unfortunately, there's nothing that can be done to avoid this. The sooner you calculate the new payments and adjust to them, the better off you will be.

Here's a hint: If you know your rates will increase by $300 per week in 4 months' time, start living as if that is the amount now, and put the difference aside. This serves two purposes: it shows you that you can afford the new rate, and it allows you to save the increase over the next 4 months, smoothing out your payments.

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And the Ugly.

For some people, things might get ugly. The new payments may not be manageable, as there may not be enough money coming into the family budget to cover the expenses. If this situation applies to you, I have three suggestions:

Take action

Act now, instead of waiting for the new rate to start. The sooner you act, the more options you'll have.

Explore your options

Consider the following brainstormed options. Not all of them may apply to your situation, but there might be some worth considering.

Get professional advice

Let's talk! Contact your Velocity adviser right away. While we can't work miracles, we can provide assurance that everything will be okay or help you navigate your worst nightmare. Once we understand your situation, we will work through the available options together.

What’s to come?

I have a feeling the Fixed vs Floating blog will be a bit repetitive for the next few months. It seems like we are in a holding pattern for the rest of the year. Therefore, there is no real change to my advice.

The "sweet spot" for interest rates is somewhere in the 1-year to 18-month to 2-year range, with a slight preference towards the 1-year to 18-month duration.

It's worth considering some form of "interest rate hedging strategy." Let's discuss the options in detail.

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Brendon.

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About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.

Disclaimer: Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.

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