Fixed vs variable
This is a question that we receive almost daily from our customers.
There really isn’t any simple answer because nobody can predict the future of interest rates, not even the Reserve Bank of Australia (RBA).
Firstly, you should decide if it’s suitable for you to fix your home loan based on the future plans for your finances and the property that is security for the loan.
When is fixing a bad idea?
A fixed rate home loan works in a very different way to a variable rate home loan.
You’ll lose a lot of the flexibility and may face high exit fees if you make changes to your loan or make extra repayments during the fixed rate period.
Don’t fix your loan if:
- You need to make large extra repayments on your loan.
- You may sell the property that is security for your mortgage.
- You may refinance your home loan.
- You plan to renovate or build a new home, often you may need to refinance.
- You don’t like being locked in with a particular lender or loan product.
What restrictions do fixed rate loans have?
- Your extra repayments are limited; usually to no more than $10,000 p.a. before penalties apply.
- You may not be allowed to link an offset account to your loan.
- You may not be allowed to redraw any additional payments that you have already made.
- You may have to pay significant exit fees (break fees) if you make extra repayments, refinance, change loan types, sell your property or pay off your loan.
However, there are some lenders that allow you to retain full flexibility with a fixed rate loan.
Please contact your lender for a specific list of restrictions that are applicable for your home loan so you can decide whether to go fixed or variable.
What are break fees?
If you make a large loan payment, switch back to a variable rate or close your loan account, then you may need to pay a fee to the bank for breaking out of the fixed rate contract. These fees are known as break fees, an early repayment adjustment or an economic cost.
WARNING: Break fees can be very significant, often in excess of $10,000 and in some cases in excess of $100,000! You can read more about this on our fixed rate break fees page.
Should you change banks?
The banks constantly compete with their fixed interest rates and in many cases one or two banks will have a special for 3 year and 5 year fixed rate loans.
So it’s not likely that your bank will be the cheapest at the time you fix.
Please call us on 1300 889 743 or enquire online and on of our mortgage brokers can give you a quote for the best current fixed rate loans.
If your bank refuses to match these rates then it may be worthwhile for us to refinance your loan to another lender.
Don’t forget about professional discounts!
If your home loan is under a professional package then you may receive an automatic 0.15% or 0.20% discount off the interest rate.
Often when you call your bank to get a quote on their fixed rates, they will tell you this is a special discount given to you because you’re a valued customer.
In actual fact, they will give you this discount automatically. If you want a better discount you’ll have to negotiate it by threatening to leave the bank.
How much should you fix?
You should try to calculate how much you’re likely to pay off your home loan over the fixed rate term and then keep that portion of your loan variable. This allows you to make extra repayments on the variable rate portion without incurring any break fee penalties.
It’s common for our customers to fix their entire loan if they are a property investor, as most of them do not make additional repayments on their home loan.
However, if they are fixing the loan over their home, it’s more common for them to fix only a portion of their loan to allow them to continue to retain flexibility and to have an offset account linked to the variable rate portion.
How long should you fix for?
The longer you fix your loan, the higher the premium you will pay for the security of a fixed interest rate.
Most people choose their fixed rate term based on what they believe the future of interest rates will be, and when they expect their circumstances or needs may change, so that they may need to refinance their loan, make a large payment off the loan or sell their property.
You should assess your own future personal needs before you decide on fixed vs variable.
Should you rate lock your loan?
If you’re setting up a new loan or refinancing to another lender then you should consider rate locking your loan at the time of application. Otherwise, you’ll get the interest rate at the time of settlement and not the interest rate at the time you apply for the loan.
Often the fixed rate changes significantly between when you apply and when you settle your loan.
How does rate locking work?
- Your interest rate is held for 60 – 90 days at the time you apply for your loan.
- Depending on the lender, you may get the lower rate if interest rates fall.
- You will not pay a higher rate if interest rates rise before your loan is advanced.
- You will pay a once off fee of around 0.15% of the loan amount to lock in your rate.
Did you know that some lenders have free rate lock? The devil is in the detail, as some lenders don’t let you benefit if rates fall before your loan is advanced! Choose your lender carefully and read the fine print before you apply.
How to fix your loan
With most lenders, you can simply give them a call and they can fix your interest rate over the phone. Give us a call on 1300 889 743 before you fix just to make sure you are making the right decision.
They can often split your loan into two loan accounts and then fix one of those accounts, this allows you to keep part of your loan variable so you can retain some flexibility.
Some lenders require that you fill in a form, if you only want to fix only a part of your loan.
Most lenders will have a small processing fee of $300 or so split your home loan, some will also charge to fix your rate.
Call us before you fix
Our mortgage brokers are here to help our customers for the life of their loan. If you’re one of our existing customers, please speak to your mortgage broker.
If you’re not yet a customer of the Home Loan Experts and would like to refinance to the most competitive lender, please call us on 1300 889 743 or enquire online and one of our mortgage brokers will call you to discuss how you can get the best interest rate around for your home loan.
We can help you make a decision on fixed or variable.