While Shakespeare may have said something similar, times are certainly changing with regard to residential mortgage lending.
Hopefully most lending consumers understand the difference between the 2 repayment types. A quick refresher, variable loans mean that your interest rate, and incidentally the interest a bank can charge you can move based on not only what the Reserve Bank does with the official cash rate but what your individual lender does. It was only 6 years ago with the GFC that lenders weren’t passing on full rate cuts and there was mass confusion in the lending market regarding what rate people were on and who was going to pass on what.
Fixed rates offer more stability, generally you can fix your rate for a period of years, generally 1-5 but sometimes longer and you are basically gambling against your lender or the market that over the course of that fixed term, your fixed rate will be lower for a longer period of time than what you could have if you had a variable rate.
There was a misconception that fixed rates or the ability to fix was for a rate higher than what you could get as a variable rate customer, this is not true and there is no set rule about fixed rate being higher than variable or vice versa, the state of the market will dictate what is happening and what rates are on offer, specifically the 90 day Bank Bill Swap Rate, (BBSR).
For information here or on what the RBA is doing, check out www.rba.gov.au and sign up for the board minutes, they’ll email them directly to you if you subscribe.
In these times of record low interest rates for Australian consumers, the current Reserve Bank cash rate is a shockingly low 2.25%, every man and his dog is trying to predict the bottom of the barrel. Even in GFC times some likely consumers were able to lock in a fixed rate at around 4.99% for 3 years. It was with Westpac from memory!
Now, banks like ING are offering a 5 year fixed for 4.59%, a wonderful offer especially for those investors looking to lock away an asset and aim for a positively geared property in a shorter time frame.
What are these fixed rates doing to the property market, this is a topic for another day! However the fixed rates are enticing for investors and owner occupiers alike so it is worth discussing what you should be aiming for.
I’m not here to predict what will happen with rates in the coming year, I for one am happy enough with how low they are and would happily fix away my loans for a period of time now. Even if rates drop once or twice in the next 12-18 months, over the course of 3-5 year term we are sure to be in front of the banks and this is where most people strive to be but rarely get too!
Now should you fix or not?
Well as with most things, it depends on the requirement of the borrower.
- Do you want an offset account? (Most lenders do not offer an offset account on a fixed loan.)
- Are you intending to pay extra onto your loan or lump sums? (Many fixed loans are rigid and have their own limits to what you can do.)
- Do you need the option to redraw? (Again, fixing may mean you lose the ability to redraw)
All valid points to consider. If you are less likely to be affected by rate increases and your cash flow is solid, then variable is generally a good option as you maintain maximum flexibility. However if your cash flow is a little tighter and a rate rise would affect you, having the security of a fixed rate may be just what you need so you are not diverting future income into a loan you hadn’t planned on!
However if you do have an investment property you plan on not touching, are receiving solid rent and waiting for capital growth, a long term fixed makes perfect sense with rates being the lowest that have been in decade, why wouldn’t you take advantage?
Our friends over at Investopedia advise that over time, a borrower is likely to pay less interest overall with a variable rate loan than with a fixed rate loan. As always, you must consider other factors and those guys mention the amortization period of a loan.
As always, for the most up to date rates, structure and questions regarding your loan facilities, contact your local mortgage broker who will be able to give you a whole snap shot of market options.