As at December 2012 Reserve Bank has decreased interest rates six times in the past thirteen months. At the same time, fixed rates are the lowest they’ve been in two decades with many one, two and three year fixed rates lower than variable rates.
These low fixed rates are increasingly being selected by our clients, with one in five loans written by Mortgage Choice in the past 6 months having a fixed rate. So right now, deciding whether to choose a fixed or variable rate can be an increasingly difficult decision.
Fixed and variable rate loans have pros and cons to be considered, which are based around not only the interest rate but loan flexibility, features and costs:
- Variable rate loans tend to be more flexible, with more features (e.g. redraw facility, ability to make extra payments); fixed rate loans typically do not.
- Fixed rate loans have predictable repayment amounts over the fixed term, variable rate loans do not.
- If you get out of (“break”) a fixed rate term, you will usually be charged significant extra costs.
When looking at fixed rates, other things to consider include any future variable rate movements and what happens if you need to break the fixed rate?
Of course you could also consider an each way bet, splitting your home loan 50/50 fixed and variable. And some borrowers choose to do just that.
In summary there are benefits and risks with both types of loans. The key is to understand all the options so that you make an informed decision.
If you would like help with deciding between fixed and variable please call us on 03 9432 6070 or click here to book a meeting.