To Fix or Not to Fix?

By the resi financial blog team, 15 January 2015

To Fix or Not To Fix

Throughout last year, most commentators were confident that the next direction for interest rates was going to be up. But with concerns building about the strength of the economy, speculation now is centered on the likelihood of a rate cut – perhaps by as early as April. 

With this possibility in mind, borrowers who were proceeding to take out a fixed rate loan to lock in the current low rates may now be having second thoughts. Instead, they are wondering if they should wait to see if rates are going to drop further.

Fixed loans provide surety around how much your repayments will be each month. This is good for several reasons: you might be on a tight budget, or you know that in the near future, you may be managing on one income. Knowing what you’re going to pay can help you plan.

But fixed rate loans do have a number of restrictions, including break fees if you exit the loan early. These can be thousands of dollars. They also have fewer features, for example, with some fixed loans you are unable to make additional repayments.

At the moment fixed rates are very low and it’s tempting to lock in the rate for the next three to five years. But if there is the likelihood that rates are going to be cut, then many borrowers might prefer a variable mortgage, as rates on these tend to fall when the cash rate is reduced – usually by the same amount.

Those who are nervous about the direction of interest rates can always opt for a split loan where a percentage of the loan is fixed, and a percentage is variable. This provides some protection if rates are cut (the variable part will fall) or if they rise (the fixed part stays the same).

Whatever decision is made, interest rates are at historic lows and with a bit of research, borrowers will be able to track down one that offers an extremely competitive rate.


Categories: fixed rate home loan, home loans, interest rates, variable rate home loan