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Published on October 18th, 2017

Mortgages: fixed or variable?

With interest rates holding at record lows, is now the time to lock in?

Low interest rates have been holding in Australia. So much so, that borrowers are becoming increasingly unsettled and uncertain of what is next.

This uncertainty is bringing about conversations from borrowers with their brokers and lending representatives. The big question is: to fix, or not to fix?

The rates today

The average standard variable rate today (as of September 2017) is 5.08%. This time last year, the standard variable rate was 4.82%.

This is still nowhere near the somewhat alarming 7% of past years.

However, it is clear to see that when comparing 5.08% to the current Australian average of 4.38% for a standard 2-year fixed rate, borrowers are tempted to fix to batten down against any future increases.

Borrowers who fix for three years could be looking at an average rate of 4.46%.

The appeal of predictability

The big drawcard of fixing your rate is predictability in your repayments.

If you fix your loan, you would be able to carefully budget your repayments in addition to other living costs, as there wouldn’t be a fluctuation.

Even if the reserve bank increases the cash rate, knowing that your repayments stay the same may provide sound peace of mind. If consistency is your priority, this may be what you base your decision on.

Fees and restrictions

If you do fix all of part of your home loan, it is important to be aware of restrictions and possible break costs.

It is highly likely that a fixed-rate loan is subject to more rules when it comes to the life of your loan and any changes that can be made.

If you feel that interest rates may go even lower and you would wish to make changes, this may be very difficult to do without penalties.

If you do the maths and work out that break costs could overshadow savings, talk to your broker or financial advisor. This may help you determine the better route for your loan.

Merits of variable

Though some borrowers place an important emphasis on safe-guarding the amount of their repayments, others look to potential positives of a variable interest rate.

If a borrower opts for a variable rate, they can likely take advantage of a more flexible loan. Extra repayments typically are allowed, which can actually reduce your interest paid in the long term and decrease the length of your loan.

Variable rate home loans can also offer attractive features, including unlimited redraw options on extra repayments, as well as attached offset accounts. They are also usually easier to change from without additional penalties.

Worldwide rates

If we look to the rest of the world, the UK has experienced record low interest rates, though the pound has fallen further against several other currencies within the last two months.

There have been three interest rate rises within six months in the USA, though the rate is still at a low 1.25%. Australian banks get approximately 40% of their funding from international sources, so analysts do concede that international rises have flow-on effects home here.

Best of both worlds
Many borrowers opt to fix part of their loan, and leave the other portion as variable. This can mean that you can customise your loan based on your own risk analysis of fixed versus variable.

You can typically determine the split ratio too. For example, you may opt for 80 and 20 or a 50/50 split, depending on your needs.

Individual choice

The best way to proceed, whether you’re a new borrower commencing your first loan, or making a choice after a recently lapsed loan term, is to determine your priorities.

If you tune into the discussions surrounding interest rate rises and combine the current data with forecasts, this may help you establish where you believe rates are headed.

Then, use a mortgage calculator and compare your monthly repayments, to the dollar, based on both fixed and variable rates.

Align these different figures to your individual goals, for example, factoring in any additional plans outside of your repayments within the next few years, or your desire to make extra payments, and you can determine your own best step.

*Sources: finder.com.au, ABC News.

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