Fixed rate mortgages rise again – have you missed the chance to fix you rate?

Westpac’s decision to increase the interest rate on its fixed rate mortgages has again widened the gap between fixed and variable rates and has led experts to declare that home owners still considering locking their rate in for the next three or five years have almost certainly missed their chance to get the best deal.

Westpac announced on the weekend that on Tuesday it will lift its one-year fixed home loan rates by 10 basis points to 5.59%, its three-year fixed rate by 40 basis points to 6.99% and its five-year rate by 45 basis points to 7.64%.

The bank blamed a rise in its funding costs for the increases. Frank Lopez, and analyst with research firm Canstar Cannex, says the average three and five year fixed mortgage rates have jumped 1% since May and again started edging up again last week after a speech by Reserve Bank Governor Glenn Stevens led many commentators to predict the next RBA rate movement will be up, rather than down.

“We don’t see any reason for rates to start coming down anytime soon,” Lopex says. “The best fixed rates are gone.”

So have those mortgagees wanting to fix their mortgage officially missed the boat?

Lopez points out that the gap between fixed mortgage rate and the average standard variable rate, currently sitting at around 5.78%, is now looking very wide. And while fixed rates are creeping higher, most economists are not expecting the RBA to increase its cash rate (which would likely trigger a rise in variable rates) until at least the middle of 2010.

He says those who fix rates now need to understand just how far their variable rate needs to rise before they will actually be saving money.

“Assume the five-year fixed rate is sitting at 7% and the variable rate is sitting at 6%; the variable rate really needs to hit 8% before you are actually making a saving with that fixed mortgage rate,” says Lopez.

“That is quite a lot of rates rises, particularly when most economists are not excepting the economy to exactly boom in the next few years.”

Bruce Brammall, owner of Castellan Financial Consulting and author of Debt Man Walking – A 10-Step Investment and Gearing Guide for Generation X says there is a very small chance that the RBA will cut rates again, but it is diminishing.

“The time to fix, with the benefit of hindsight was about four or five months ago.”

That said, he points out that fixed rates still remain low by historical standards and certainly lower than 12 months ago, when five year fixed rates were sitting at around 10%. He says that if you are still keen to lock in rates, you can still get a reasonable deal by historical standards, particularly if you do a bit of shopping around.

“To say that the boat has left the shore is probably right, but if you run and jump you can still get on.”

He sees fixed rates as insurance policy against big rises in the variable rates and says that some mortgagees love the certainty that fixed rates offer.

Adir Shiffman, chief executive of financial research site HelpMeChoose.com.au agrees and says the decision on whether or not to fix comes down to personal psychology.

But while he is unwilling to make a call on whether or not to fix, he points out that the banks consistently report that those who stick with variable rates are typically better off than those who fix.

But he says that for some people, the certainty of knowing your rate five years in advance is very important.

“Consistently, people that have left rates variable have done better than those who have fixed rates, but they’ve probably had a few more sleepless nights,” Shiffman says.

“But if you can wear that uncertainty from standard variable rate then, according the banks, you will be better off in the long-term.”