Should you fix your rate?

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As if the current financial climate and all that goes with it wasn't confusing enough, the news in recent weeks that some major lenders have increased their fixed rates has many unsure of what is going on - or what they should do.

This uncertainty is further increased by uncertainty about what the Reserve Bank of Australia (RBA) will do in the coming months if Australia heads into a full blown recession.

So, have rates "bottomed out" or is there still room for them to come down further?

What investors should be aware of is that the recent move by some lenders is more a reflection of what they believe will happen in two to three years, rather than what is happening now.

With interest rates at current record lows, it is obvious that they will start to move back up at some stage and some lenders are reacting to that now.

Recent fixed interest rate movements are more about how these lenders manage their business than a reflection of the interest rate cycle. As a result, those with home and investment loans should still exercise caution if considering fixing their rate.

Most people choose a fixed rate to have the certainty of knowing exactly what their repayments will be or to capitalise on a good rate, so fixing may still be the preferable option for some people.

However, for those who have a buffer in their monthly household budget and can afford repayments at potentially a couple of percentage points higher in the future, there is a lot to be said for the flexibility offered by variable rates.

Variable loans generally are more likely to have features such as offset and redraw accounts and in an environment where circumstances can change quickly, this flexibility can be very important.

The confusion over recent events highlights the increasingly complex nature of banking and finance.

Therefore, advice on what is best for your individual circumstances is more important now than ever before.

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