Do I need fixed or variable interest?
When it comes to choosing a mortgage, the first question people usually ask is “Should I get fixed or variable rates?”
As with any other financial decision, the answer will depend on your specific circumstances, your financial situation and how long you plan to hold the property.
A word on risk
On a variable rate loan the interest you pay will go up and down roughly in line with the rates set by the Reserve Bank of Australia.
So if interest rates fall, you’ll have the choice of making lower monthly payments or continuing to repay the same amount, thus paying back the principal more quickly. But of course if they go up, you might end up repaying substantially more than your original budget.
Even the smartest economists can’t always predict which way interest rates will go so that a variable loan is always a risk. You’ll need to think carefully about whether or not you can afford to take that risk.
Meanwhile a fixed rate mortgage is exactly what it sounds like – a loan where your interest payments are fixed at a given rate for an agreed period, usually one, three or five years.
Fixing your rate gives you certainty about how much you will pay each month, which is great for budgeting and protects you against potential interest rate rises.
The cost of fixing
While this may seem appealing, it comes at a cost.
Firstly, you don’t get to take advantage of any drop in interest rates so you could end up paying more than the variable rate. The fees for fixed rate mortgages are usually higher too, but the real cost is in the lack of flexibility.
With most variable loans you can make extra repayments at any time or even pay off your entire loan early without penalty. You may also be able to get an offset facility, where any interest you earn on your savings will reduce your mortgage interest. Fixed rate loans rarely offer these features and there can be hefty ‘break fees’ if you want to repay your mortgage early.
So if you only intend to own the property for a short time or if you’re hoping to pay off your mortgage quickly, a fixed rate loan could work against your goals.
The middle ground
Some lenders offer ‘combination’ loans, where you can fix the rates on part of your loan, and pay variable interest on the rest. This sort of loan offers some insurance against rate rises as well as potential upside if rates should fall and also allows some flexibility in repayments.
However, fees can be high and the fixed portion of the loan is likely to be as ‘locked in’ as any fully fixed loan. So a combination loan generally offers the best – and worst – of both worlds.
At Loan Market Townsville we can give you comprehensive information and guidance to help you choose the right mortgage for your specific needs.