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Fixed or Variable Home Loan? Weighing up the options.

This article was written by the Director of Navi Finance Pty Ltd. 

Often enough whenever I am introduced to someone at an event or party, and after they find out that I run a mortgage broking company, I get asked this question: 

“Is this a good time to fix my home loan? Given current all-time low RBA cash rate, would interest rate drop further, or are we at the bottom and the only way is up?”

Well to put things in perspective, interest rates are at a historical low in Australia including many parts of the world. Governments have been spending heavily and giving out cheap funds to spur their economies. Similarly, Australia RBA has cut its cash rate partly in response to COVID-19 outbreak in view of stimulating Australian businesses and the economy. With the availability of cheap government bonds and low wholesale lending rates, banks are able to reduce their cost of funds, resulting in low fixed-rate loans. 

However in recent months, due to current economic and political changes, interest rates have inevitably been affected. It is noted that many financial institutions have been raising fixed-rate loans, with potentially more rise forecasted in 2022/2023.

So should you go for a fixed-term rate?

As any wise person would, ask yourself some questions to make a decision best suited for your circumstances.

Consider fixing your loan if:

  • You are a planner and want peace of mind! Seeking certainty of interest rate over a period (between 1 year to 5 years).
  • You are on a budget! This helps you better plan your cash flow for the period.
  • You do not intend to sell your property within the fixed period.
  • There is no foreseeable receipt of lumpsum funds that you can use towards paying down your loan.
  • You are comfortable staying with the bank and that particular product for the duration of the fixed term.
  • You are not after the kind of flexibility that comes with a variable loan.

Fixed rate loans may save you money…

If interest rates increase during the time when your rate is fixed, you will be protected from paying more. When your mates are complaining about having to give up their daily coffee, you are safe in the knowledge that your repayments are not going to change.

Apart from the RBA announcement of cash rate position, the direction of interest rate for fixed-rate loans is a potential indication of the mid to long term cost of funds in the money market. For example, if most fixed-rate loans are higher than variable rates, the money market is likely predicting an increase in interest rates.

You may lose out in paying less…

One would hate the idea if you forfeit your chance to pay a reduced interest rate if variable rates goes lower than the fix rate during the period. When other borrowers are enjoying a well-earned reprieve, you will still be making the same repayments. 

How about a cocktail?

If you still cannot decide, perhaps a part fixed and part variable loan be the solution you may be seeking.

However keep in mind that if you choose to fix part of your loan and leave the remainder as variable, you will still be locked in for the fixed portion of the loan.

No one has a crystal ball to tell the future, however, banks have started to raise their fixed term rates, especially their four- and five-year fixed-term loans. This may be an indication that the mid-term outlook for the economy is going to be robust with a potential uptick in inflation rate.

The information published in this article is general in nature only and does not consider your personal objectives, financial situation, or particular needs, and is not recommending any particular product to you.