to fix or not to fix....

The Reserve Bank announced yesterday that the cash rate would remain unchanged at 6.25%. The inflation outlook is benign as key economic indicators such as the increase in monthly consumer spending have come in below expectations.

Recently I was asked about the pros and cons of fixing a home loan rate. When fixing a rate, you are essentially betting that you know more about the future direction of interest rates than the banks. This is a bet you are unlikely to win. However, fixing a rate does provide peace of mind and certainty for the period the rate is fixed. It really should be viewed as analogous to taking out an insurance policy.

If the certainty of a fixed rate is attractive and you have both tax deductible and non-deductible debt, you could have a bet each way by setting up your home loan with a fixed rate and combine it with a variable rate business line of credit. It makes sense for the rate on the business loan to be variable because interest is tax deductible. This means that if interest rates rise by 1%, your effective rate would only increase by 0.585% after taking into account the tax deduction. The ATO would effectively pay 41.5% of any interest rate increase (assuming taxable income between $75,000 and $150,000).

Getting finance structured correctly is much more important than whether you fix a rate. Before borrowing money it is always wise to give us a call to ensure the debt is as efficient as possible. In particular, we want to see non-tax deductible debt eliminated quickly. If your bank is not very responsive, we can also refer you to financiers who specialize in servicing health industry professionals.

Matthew Perry