Mortgage tips: Should I choose a fixed or variable rate loan?
Since the GFC, variable rates have been very competitive. However, as fixed rates are affected by long term money market rates, they have decreased quite a bit in recent times.
So should you be fixing your loan or going variable? There are pros and cons for each relating to the specific loan type you take out, but as a guide…
Upside of a fixed interest loan
- You can accurately budget your repayment.
- They help you budget for and manage other expenses.
- Security and peace of mind in times of interest rate uncertainty.
Downside of a fixed interest loan
- Your rate of interest stays the same even if the variable rate goes down.
- You may have to pay a break cost fee if you pay extra amounts, pay off the loan early or switch to something else.
Upside of a variable interest loan
- You gain the benefit of every interest rate drop.
- They often include a range of extra features such as redrawing on funds and making extra payments without penalties or fees.
- They will often have a low introductory or honeymoon rate for an initial period.
Downside of a variable interest loan
- You pay the price of every interest rate rise.
- Fluctuations make it harder to budget accurately for mortgage repayments and other expenses.
One alternative is to split your loan. In other words, fix a portion of your variable loan to hedge your bets on interest rates going up or down.
You nominate how much of the loan you’d like to be secured with a fixed mortgage interest rate and the remaining amount moves at the variable rate.
Consider a rate lock on your fixed interest rate
When you take out a mortgage there’s a period of time you’ll need to wait for settlement. During these weeks or months, the interest rate could go up (or down). The fixed interest rate you pay will be the figure on the day of settlement.
You should consider paying a Rate Lock fee that protects from the possibility of rising interest rates.
Most rate lock fees are around about 0.15% of the fixed rate loan amount. So, for example, if the RBA increased the interest rates by 0.2% or more before settlement you’d save money.
What’s right for me?
Without a Reserve Bank crystal ball it’s impossible for anyone to guarantee the right loan to choose.
However, the Zenith team can offer you some very sound advice to suit your individual financial situation and the property you are buying.