It’s the age old question when it comes time to decide on your choice of mortgage: To fix or not to fix. You’ve decided on a new home but not the mortgage. The Australian market has predominantly been a variable rate one with only12 per cent of home loans being fixed over the last 22 years. So why is it that we Australians prefer to gamble on variable home loans over fixed mortgages?
The fixed option
Choosing a fixed rate mortgage has, like anything, pros and cons. One of the pros is also its biggest Achilles heel. Fixed rate mortgages are usually only offered in terms of 1, 3, or 5 year terms. This means you can budget your repayments and they won’t fluctuate for the term of the loan. If the market rates rise you won’t need to pay a cent more but the downside is the fixed term. If the rates do rise you won’t have to pay any more money, but if they were to plummet below your fixed rate you will be spending the next 1, 3 or 5 years brooding on how much extra interest you are paying.
You need to check the fine print to see if you can make extra repayments. Fixed rate mortgages often exclude the ability to make extra repayments at all, or they incur a fee. An option would be to make those extra repayments into a high interest term deposit then, when your fixed rate term expires, transfer the money on to your mortgage.
Early exit fees, or break fees, are normally applicable to fixed loans. All of these factors need to be taken into consideration when signing up for a fixed rate mortgage.
The variable option
Variable mortgages are the choice of most Australian households. The enjoyment of watching market rates drop and knowing your repayments will drop alongside it is a wonderful feeling and there are no break fees for those fortunate enough to pay off their loans early.
Many variable loans also contain benefits like ‘honeymoon rates’ which will offer a much lower interest rate for a set opening period of the loan before reverting back to normal. The downsides of variable rates are that you need to budget for increases in repayments. If you’ve overcapitalised on your loan you may feel the pinch if successive interest rate rises squeeze the family budget.
So which one is right for you?
A decision on which mortgage to sign up for depends entirely on your individual financial circumstances. Interest rates can be unpredictable so if this bothers you then a fixed rate may be the best decision. If you have an excess in the budget every month and you enjoy the ride that market fluctuations can offer, then a flexible variable package may be for you.
There is also the option of a split loan. These ‘cocktail loans’ as they are known, offer you the option to split your loan into both fixed and variable portions. This means that you will have a steady repayment part, unaffected by market variables, and a portion that you can make extra repayments on. You won’t receive the full benefits of either package but it does offer you some security in uncertain times.