It raises the temptation: do I lock in a fixed rate that is lower than the current variable rate, or do I stay variable?
It is attractive but it is important to take a long-term view and also to be aware of the downside of fixed rate loans.
Suzanne
Haddan, head of a Sydney-based financial advisory firm, says there are
significant restrictions with most fixed rate loans.
"They
generally have what we call break fees, and that means if your
circumstances change and you want to renegotiate or change your loan,
there's generally a cost," she said.
Ms Haddan says you should place a high value on flexibility.
She points to other situations where you may not want to break the loan, but you may want to vary what you do.
"For
example, couples may be planning a family and want to get ahead on
their loan — with a fixed rate loan they are stuck for the period of the
loan," she said.
Fixed rate loans also lock you into your bank (or other financial institution).
If you find a better deal elsewhere it can be very hard to switch.
There
are also usually restrictions around the use of 'offset' accounts,
which is where money deposited in a savings account will reduce the
interest on your home loan.
But probably the biggest negative with a fixed rate loan is the restrictions around making extra payments.
In
the current climate where variable interest rates have been falling (up
until this week) most people have left their home loan repayments
unchanged, which means they are getting ahead on their loan.
If you have a fixed rate loan you will not be able to do that and it could cost you thousands of extra dollars in interest.
With interest rates so low though, you may be tempted to think that variable rates have only one way to go, and that is up.
Ms Haddan questions that.
"When
you are looking at fixed rates you are really taking on the bank and
they are not going to set a rate where they may lose money," she said.
"If you want to take an each-way bet you could fix part of your loan and keep the rest variable, but it's a gamble."
Ms
Haddan believes over the long-term you will save money with a variable
rate loan even if the movement between fixed and variable interest rates
fluctuates.
The reason is the extra money you can pay off a variable rate loan, which reduces your interest bill.
Ms
Haddan says she only recommends fixed rate loans for clients who will
not be able to cope with any rise in interest rates and need the
certainty that fixed rates deliver.
