To fix or not to fix your home loan rate?

September 22, 2013
Ian Robinson

With variable rates around 5% and fixed rates (let's work on 3 years) a little below that then it may seem like quite a decision to make over whether you can get better value from a fixed rate than a variable one.

If you remove the emotion and concentrate just on the mathematics of the transaction then the decision becomes a little clearer.

Say we are looking at a 30 year home loan at 5% variable. Payments would be about $1,342 a month. If it were changed to a fixed rate then payments would be about $1,327 a month (if we chose a 4.9% rate). This is a saving on fixed of $15 a month. Chances are though that the wwitch would cost you between $200 and $300 to complete, so whilst you would be $15 in front each month it would take almost 20 months to make your money back before seeing the cash benefit.

If in that time rates go down by a quarter of a percent in say February and then are lower than your fixed then you are behind again as you would be paying higher. But if rates went up in September next year then you would be further in front and your time needed to break even would come down from 20 months to under 10. Dammit! How do you know if it is the right thing to do?

DON'T DECIDE ON PRICE ALONE if that is your only motivation! UNLESS it is exceptionally good value and you could be in front within a very short time and are almost at the bottom of a cycle.

Think instead of the lifestyle effects such a change will have on you. Are you currently paying extra off on your home loan, if you do fix then you may not be able to do that as much, or even at all. Do you expect to move within the next few years, or may not have the most stable work environment at the moment? If those are the cases then fixing may not be for you. Is your relationship rock-solid? I have seen many defactos, even married's fix their loan and then a short while later decide to call it quits with each other to instantly find that they are stuck with a house that is secured by a fixed rate loan that they can do nothing with as the penalties to break it are so high and that makes for a very awkward ex relationship, even to refinance it into one name.

Finally, don't panic - like lots of people in 2008 when rates started to rise and they rushed to fix in at 8's and 9%'s - as they found themselves way out of the market a year or so later and for many it became a very expensive exercise.

Bottom line is to give me a call, I can run the numbers for you, ask you a couple of lifestyle questions about future intentions and budget issues, and give you an unbiased opinion of what may lie in store for you in both scenarios, or a blend of the two.

Best of all the service is absolutely no cost to use, so call when you have a conundrum regarding fixed vs variable and I can help you the best I can. Call 5474 4100.

Posted in: Interest rates

Contact us today.

Additional Comments? * :