It is a given that the central bank will move the OCR down.
However, does that mean that fixing short is the best approach to fixed-term home loans? When the future outlook looks grim, investors are happy with a lower return for the longer term. Hence, we have had longer-term fixed rates that are lower than the shorter-term ones. This is a great position to be in as a homeowner, as you can get long-term certainty without paying a premium, with the cost being that you miss out on any drops.
Does the future look brighter?
Not quite yet; however, at some point, we will all be confident that things are only going to get better and better. At that point, you would expect investors to want a better return if you want their money for longer, as they would expect the future to provide a better return. A better economy in the future could also mean a return of inflationary pressures, which usually means higher interest rates.
When the outlook on the horizon looks brighter and brighter, expect the relationship between short and long to change.
A word of caution: I am not an economist, but from past experience, I can say that longer-term fixed rates will, at some point, be higher than the short-term ones. This might happen well before any increases in the OCR.
Should I fix longer now?
Maybe—it depends. The fundamentals of not knowing the future do not change with the volume of a particular message. There are still situations where one requires some certainty in cash flow, such as possible negative changes to income or just a large level of debt relative to one’s income. So it is still worth considering fixing debt levels for longer.
There is also the chance that fixing short until the bottom of the short-term rates are reached might not give the opportunity to lock in at the low point for the longer-term fixed rates.
Either way, consulting a good financial adviser like ourselves is important.
