Interest Rates – to Fix or Not to Fix? That is the Question.

© Property Professor articles —
Reproduced with permission.

No-one can be sure where interest rates are going in the short term. How can we have some certainty about our own mortgage repayments in this topsy-turvy interest rate environment? One way is to lock in your mortgage repayments over a period of time by fixing your interest rate. Most Australians take out loans with a variable mortgage interest rate but some opt to fix their rate. Before you choose between a fixed or variable rate mortgages, you need to be aware of the advantages and disadvantages of each.

Fixed Rate – Advantages
• Your interest rate, and therefore repayments, is fixed for a specific period of time.
• It aids in the “sleep well at night factor”
• You can secure in a relatively low interest rate if you think variable rates are to increase

Fixed Rate – Disadvantages
• You are locked in and if you try and break the loan agreement, it can be very costly.
• If you sell the property before your fixed rate period is due, you may need to pay hefty break costs.
• Unfortunately most people fix when interest rates have almost peaked which means they lock in relatively high mortgage repayments and can’t take advantage of lower interest rates in the future.

Variable Rate – Advantages
• Most popular form of loan
• Can take advantage of low interest rates
• Less restrictions on lump sum and/or early repayment of loan

Variable Rate – Disadvantages
• You are at the mercy of the market; if banks and/or RBA increase interest rates, your payments increase.

There are many reasons why you might wish to fix your interest rate but if you can’t decide between the two, you might like to “hedge your bets”. You can take out a split loan where part of your money is borrowed at a variable rate and part is fixed. By splitting your loan, you can have the best of both worlds!

Before deciding on variable, fixed or a split loan, you should seek some qualified advice from a Property Planning Australia adviser.

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