To fix or not to fix? That is the question… Or is there another way?

July 20, 2017

“Mortgage”. It’s origins are Latin and literally mean a “death pledge”. It can certainly feel like that sometimes. So how can you beat the market and stay ahead of the game?

The Reserve Bank of Australia has maintained its current stance by keeping the official cash rate on hold at 1.50% for eleven months now and there is an expectation that this will continue for the rest of this year and well into the next one. Despite this though variable and fixed business and home loan rates have been on the move throughout 2016 and 2017, and they’re on the rise.

With the average standard variable home loan rate nationally at 4.47%, savvy borrowers can currently get fixed rates much lower than that (saving as much as half to three quarters of a percent). That’s a huge saving in what is often the biggest budget buster. With most Economists agreeing that when the RBA do eventually make a change to the official cash rate it will be an increase, not a further reduction, is now the time to look at locking in a rate?

Fixed vs variable?

Let’s look at the pro’s and con’s:

Advantages of a fixed rate loan:

  • The main advantage is cash flow certainty, knowing exactly what your loan repayment will be over the fixed term period. When you are a new home owner, or are perhaps setting up a business, or have some other significant demand on your cash, this certainty can give you great peace of mind. It also protects you from any future rate increases of course – that payment is locked in.

Disadvantages of a fixed rate loan:

  • They are certainly inflexible and can be expensive if you break the contract. You also miss out on the benefits of any interest rate decreases over the timeframe of your fixed term.

The vast majority of people in Australia choose to finance their home with variable home loans, largely due to the freedom and greater number of options they offer. More than convenience, this flexibility can actually allow you to save substantial amounts of money over the course of your mortgage. How? With a variable loan you have the ability to make extra repayments on top of your scheduled instalments with no penalty. Do this regularly and you could shave years off the length of your mortgage, greatly reducing the overall amount of interest you need to pay. Open an Offset Account and you can benefit further and save even more.

So if I choose to fix my home loan when is a good time?

Sadly, there’s no one correct answer to this. If we look at the history books a comprehensive analysis by Canstar found that over the last 20 years, around 50% of borrowers who took out a fixed loan SAVED more money than if they’d taken a variable mortgage so with a healthy dose of luck you may be able to use a fixed rate mortgage and beat the market but by no means is it a certainty.

There is a third option of course that sits alongside Fixed and Variable and that’s to take advantage of BOTH. Split the balance of your loan across Fixed and Variable and hedge your bets !!

The best advice?

Speak to an expert and talk through with them your own personal circumstances. Then you can make the decision that’s right for YOU.

Speak to your FCA Bookkeeper today and they can help.

Financial Management