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To fix or not to fix?

Michelle Hudson

Whilst we have been enjoying the Reserve Bank’s interest rate cuts and watching the variable interest rates reduce, the banks have already been looking into the future and have slowly been raising the fixed interest rates.

If you are currently on a variable interest rate and you want to lock into say a 5 year fixed rate, with any bank the difference between the variable rate and the fixed rate is presently more than 2%. To break even the current variable rate would need to rise that 2% plus within roughly two and a half years. Will interest rates rise that much within two and a half years?

If you lock into a fixed rate now, using the 5 year fixed rate example and a $400,000 Home Loan, your repayments will increase $593 per month.

Also, once you fix the interest rate you limit your future flexibility as fixed rate loans usually come with big break costs when you pay a loan out in full e.g. You might have plans to upgrade to a larger property for your growing family in the future. With a fixed rate loan usually all aspects of the loan are fixed which include a limit to the ability to make extra repayments and redraw is almost always not an option. (Check with your lender in regards to the limit on the extra repayments that you can make.)

Here is something to consider.
Why not work the current repayments out on the higher rate, leave them on the variable rate and with the extra repayments shorten the term of the loan. These extra repayments can then be later used as redraw if required (if your loan has that feature) but the most important point is that it will reduce the term significantly and you are taking advantage of the lower interest rates now.

If you want the certainty and will lose sleep at night worrying about interest rates increasing, another option is to split the loans so that you have the best of both worlds. In this way you have security and flexibility. In effect you are hedging your bets.

One of the banks has a new product on the market which I haven’t seen for a while. It is variable rate loan with a cap set on the interest rate. This means that the interest rate is guaranteed not to increase past a certain limit for a pre-determined period. If you feel like this might be an option for you, ask your bank if they have it, and if not talk to a Mortgage Broker.

Lastly, Merrill Lynch has surveyed consumers and found that those with a variable interest rate came out ahead of those in a three year fixed rate 83% of the time in the last 20 years.

Try and pay extra whilst the interest rates are low. 

If you liked this article you might also be interested in these articles about property and mortgage advice:

Advice for first home buyers

How much is your property worth?

Want more? Take a look at the rest of our property and mortgage advice articles.

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Author's Biography

Michelle Hudson is a Finance Broker and founder of The Loan Lady.

Michelle has been in the banking and finance industry for over 30 years assisting people to finance their dreams from motor vehicle purchases through to property and business purchases.

‘I help you find the loans that the banks don’t advertise.’

Email Michelle on michelle@theloanlady.com.au or look at the website www.theloanlady.com.au