Interest rates - To Fix or Not to Fix – that is the Question!

Interest rates have been dominating the headlines since the GFC (Global Financial Crisis), but did you know that the latest hot topic is fixed rates? The reason is that there has been a bit of a price war going on between the lenders in the fixed rate market for the last few months and whilst some lenders have recently increased their fixed rates, others have reduced them.

Whilst most competitive variable rate products are currently between 5.80% and 6.00%, some lenders are offering 2 and 3 year fixed rates from as little as 5.59%. So now is an excellent time to consider changing your loan provider or even re-structuring your loan with your existing lender to take advantage of these rates.

Benefits of a fixed rate include:

• Certainty of monthly repayments - you don’t have to worry about whether the RBA increases or decreases the cash rate and more importantly; you don’t have to worry about what YOUR lender decides to do with their variable rates
• Allows for precise budgeting (especially if you are on a tight budget)
• Currently some fixed rates are lower than most variable rates

The Disadvantages of a fixed rate:

• Reduced flexibility - Additional repayments are limited and redraw is generally not available during the fixed term

Terminating a loan during the fixed rate period may attract hefty fees

Benefits of going with a Variable Rate:

• You are able to make additional repayments (from bonuses, tax refunds, inheritances or just plain “savings”)
• You have the option of an Offset account linked to your loan which can help reduce the interest you are charged on a daily basis (reducing both the life of your loan and the overall interest charged)
• If interest rates drop – you can either make head-way on your loan by keeping your repayments the same or you can choose to reduce your monthly repayments and use the money elsewhere (savings, investment, etc)

The Disadvantages of a variable rate:

• Of course the downside to all this “flexibility” is that you are at the mercy of interest rate fluctuations and this can cause financial difficulties if rates rise significantly.

Want to have your cake and eat it too?
As you can see, there are pros and cons to both fixed and variable rates when it comes to your mortgage.  There is a way to “hedge your bets” or have your cake and eat it too by splitting your loan.  Of course, what portion to fix will require some thought and planning and your mortgage broker will be able to help you with this as there is no hard and fast rule.

Things to bear in mind 

• Consider your plans for the next 3-5 years. If you are planning on selling up and moving in the next 2 years, don’t fix for 3 years.
• Keep the variable split to an amount you anticipate repaying over the fixed term.  There isn’t any benefit to having a $250,000 variable split if you can only manage to repay an extra $20,000 over the time frame that you fix the loan for.
• If you are on a tight budget – consider fixing a larger portion of your loan.

If you want a better deal on your mortgage or talk through your options, make an appointment with a licenced and MFAA accredited mortgage broker today!

By Sandra Crossland
Sandra is a qualified Mortgage Broker with a Diploma of Financial Services (Finance/Mortgage Broking Management FNS50504) and has been helping people achieve their dreams of home ownership since 2006.