Interest Rate Fixing

[Note that we first posted this article in July 2009.  Since then, and through until the previous update, interest rates continued to fall.  The downward slide continued until the official rate was barely above zero!  During 2023 and 2024 they rose again to devastating ‘high’ rates – of around 5%. That rate was devastating because of the high inflation and deteriorating economic conditions globally.  Neither of these circumstances were even close to the rates of interest and inflation of the late 1980s.]

How long will interest rates stay at current levels?

Direction and Timing of interest rate change –

Which direction do you anticipate interest rates moving next?

[A interest rate fixing may look attractive when signing up, but prove expensive if –

• rates either fail to climb at the anticipated rate; or
• in fact, fall for some unforeseen reason.

Some insight at to the direction of RBA rate movements, might be seen in the rate offered by lenders.]

What timing do you believe will be applicable to the move in that direction?

[If the time until the next increase in rates is too long, the fixed rate ‘premium’ may render the actual interest paid excessive to what would have been paid under the variable contract.  In 2016, many ‘pundits’ of the money markets predicted that the RBA would not further lower official cash rates.  As it panned out, two interest rate cuts occurred soon after.  Markets then speculated – correctly – that yet further cuts would be announced.]

Term and proportion of debt with fixed rate –

Is the loan you would consider ‘fixing’ one that is decidedly long-term?

[Unless the loan is one that is going to have a ‘core’ element to it for the term of the interest rate fixing –

• the cost of the interest and/ or
• the ‘break fee’ could again render the actual interest too high.]

Should you fix the whole of the debt?

[Given some of the above considerations, should the loan be split into a fixed and a variable portion. Advice should be sought as to the appropriate apportionment in individual circumstances. Whilst a ‘headline’ rate of interest might sound appealing, the actual interest cost is what has to be paid by the borrower.   That rate could come as a disappointing surprise.]

How long a term should you fix any loan for?

[Depending on some of the other considerations –

• a three-year term may be adequate; or if applicable – and other aspects are satisfied –
• the five-year option could be worth considering.

Again this is a consideration that is very specific to each individual set of circumstances.  We recommend that advice be sought before undertaking interest rate fixing at any time.]

Is the loan secured against an asset that can be substituted if a disposal opportunity arises?

[Not all loan documents are alike. Some allow for substitution, others don’t have that provision. If substitution is not available, a ‘break fee’ will most likely apply – and could prove expensive.]

Are there any business or other financial impediments to fixing all/ any portion of the loan?

Should you ‘fix’ any part of your loan to set interest rate?

It is often very difficult to get the timing right for this decision –

• borrowers have difficulty picking the rates that will apply for any time in the future; and
• they often have great difficulty determining what the future holds for some assets.

If fixing interest rates is something you want to consider at this time, we suggest that you contact –

• your accountant,
• your financial planner, and
• your loan manager,

to gather the information you need to make the right decision in your prevailing circumstances.

To speak to an adviser at Continuum Financial Planners Pty Ltd, make an appointment, by –

• phoning our office, on 07-34213456 or
• at your convenience, use the linked Book A Meeting facility.

(This article was originally posted by us in July 2009.  We occasionally refresh/ update it, most recently, in March 2025.)