In a quandary to fix or not to fix?

February 22, 2013
Deborah Cloake

Some lenders have started to reduce fixed interest rates on their home loans, stirring debate around whether borrowers should fix all or part of their loan.  The decision is made harder by the fact that the cost gap between fixed and variable rates is closing and that some fixed rates are currently priced lower than that of variable rates.  Our extensive lender panel currently has an average for three-year fixed loan at 5.49%. In comparison, the average basic variable rate is 5.90%. This is a cost difference of around $78 extra per month. Two months ago the difference would have meant almost $113 extra per month on a $300,000 30-year home loan.  When looking at Mortgage Choice’s customer database, loan approvals for January showed demand for variable rate loans made up 84% of all new loan approvals.  Despite these preferences, there is no right or wrong choice when entering the fixed vs. variable decision process. Borrowers need to think about their current lifestyle and needs as well as future plans and goals, and ensure that they make the best decision for them at the time.  Before rushing in and deciding one way or the other, I encourage borrowers to do their research to help them assess the pros and cons of each loan type. Existing mortgage holders also need to factor in the cost versus benefit of switching loan types.   Start by looking at the facts; compare the interest rates from a wide range of fixed and variable rate loans. You may also want to throw a third equation into the mix and consider part fixed/part variable loans.  Potential and existing mortgage holders who are considering fixing their home loan’s interest rate need to focus on the reasons why they want to fix. Often it is because you are looking for repayment certainty, and fixing part or all of your loan will provide you with the financial stability that you need.  Keep in mind that while fixed rate loans offer peace of mind over your repayments for a set period, these types of loans may have fewer features on offer when compared to variable rate loans. For example, they may not have an offset account or the ability to make extra repayments.  Also, remember that once you are locked in to a fixed rate loan you may incur break costs if you choose to switch loan types during the fixed period.  When weighing these aspects up against variable rates, it’s worth noting that variable rate loans tend to be more flexible by nature (with features as well as the interest rate) and you can take advantage of falls in interest rates. However, when rates rise so too will your repayments.  Another option is to take little bit from each and fix part of your home loan. This way you could enjoy a degree of security, knowing that part of your repayments are fixed while enjoying the flexibility of any further variable rate cuts.  There are risks and benefits with both types of loans, so the key is to keep yourself educated and research all of the options available to you. There are many aspects of a home loan to take into consideration before signing on the dotted line, so make sure you know what you are getting yourself into from word go.  For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"

Posted in: Interest rates

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