Fixed Rate Loans or Variable Rate Loans:  What’s Best for You?

Trying to determine whether a fixed rate loan would be better for you than a variable rate loan boils down to guessing which way the rates will go.  As you know, mortgage interest rates are impacted by changes in the cash rate set by the RBA (Reserve Bank of Australia).

With a fixed rate loan you lock in an interest rate for the length of the loan, usually 1 – 5 years.  At that point you would be able to renegotiate a new fixed rate or switch to a variable rate.

With a variable rate loan, the interest rate you have at the beginning may go up or down during the loan period, depending on what the RBA decides to do with the cash rate.  If you took out a 6.5% fixed rate loan and the cash rate later drives the rate up to 7%, you won!  However, if the rate goes down to 6%, you lost!

So what do you do?

First, there are other advantages and disadvantages to consider besides the rate itself.  Here are a few:

With fixed rates you are in effect paying interest only and there are usually penalties for extra repayments.
If you opt to make extra repayments on a fixed rate loan, you most often cannot redraw them as increased equity in the home.
If the rate drops and you have a fixed rate loan, your monthly payments will be higher than they would be had you taken a variable rate loan.
If the rate rises and you have a variable rate loan, your monthly payments will increase.

The best advice you can get to deal with this dilemma is to seek the advice of a trusted, reputable mortgage broker or lender.  They will ask you to consider whether your income is sufficient to accommodate a potential increase in your monthly payment. 

At the present time, mortgage rates in Australia are near historic lows so many experts feel it is more likely that they will rise than fall.  If your near term income is at all in doubt, a fixed rate loan may be your best option.