FIXED INTEREST RATES VS A VARIABLE INTEREST RATE

We had a client come to us who just completed renovations on their Port Melbourne home, with a $350,000 mortgage, a six year old to raise, two cars to maintain and the expectation of another baby due around the corner which would soon mean surviving on one income. After talking to use, we made them complete our comprehensive budget spreadsheet of which clearly empowered them to decide on fixing the bulk of their loan. It makes sense especially when several lenders often have fixed interest rates of up to 1% less than their standard variable interest rate.

Clients often ask us if they shoudl fix their home loan. Our common response with that question is fixing your home loan is a good idea if you're worried about risk and exposure or if you've already reached your maximum pain threshold so to speak. Having said that, over 70 per cent of our clients have opted for fixing at least some of their loan and in most cases this is at least 75 per cent of the loan.

Most of us know that variable interest rates are primarily priced off the official cash rate, which is set by the reserve Bank of Australia every first Tuesday of each month. These are subject to short term influences such as inflation figures. On the flip side, fixed rate loans tend to follow what's happening in the bond market, the market for longer-term securities that anticipate where rates are heading. These are more strongly influenced by economic events overseas, particularly in the U.S.

When choosing between fixed mortgages, there is much more to consider than just the interest rate. We've listed five key areas for you to think about:

1. Most of our fixed rate products still allow you to make some form of lump sum repayments without penalty. In fact, most allow you to pay an extra $10,000 per year without penalty. Having said this, we have a couple of lenders on our panel that allow you to make unlimited extra repayments and allow you to redraw these extra repayments at any time.
2. Some lenders may offer a special rate this month, and borrowers decide to take the fixed rate loan because of that, but when the fixed term finishes, the loan reverts to a higher rate relative to others.
3. The ability to have a split loan would be a benefit for consumers who would like to get the features of both variable and fixed loans. However, make sure you are paying only one set of fees instead of two.
4. If you decide to refinance to another lender during the fixed term be wary of the size of the break cost. The break cost will vary according to the amount of money that you pay early, the term remaining on your loan and the amount that fixed interest rates moved since taking out your current fixed home loan. Having said this, make sure you think long and hard on the length of the fixed term to avoid this break cost.
5. Most lenders offer the 'fixed rate lock in' feature. This allows you to lock in a lender's competitive fixed rate for up to three months once you have bough a property, or while you are looking for a property, or even refinancing just in case it moves up by the time your loan settles. Secondly, most lenders like to charge up to 0.15% of the loan amount to avail of this feature. We have a couple of lenders on our panel that don't charge this fee.