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Buying a home requires meticulous planning and research. From saving an adequate deposit to choosing the right home loan, every step requires careful consideration. Most often, borrowers find themselves confused between fixed and variable rate home loans. Fixed vs. variable is an age-old debate with the winner only depending on your individual situation. 

With news of an imminent rate hike in the future doing the rounds, many Australians are rushing to fix their loans. However, experts warn it could be too soon to make a beeline for a fixed rate loan. 

With the gap between the fixed and variable rates currently being only a few basis points, it is an indicator of banks’ confidence that the RBA cash rates for the fixed period (usually three to five years) will remain low and, possibly, go lower. Thus, fixing your rate now could mean paying more in the future than your counterparts who chose to ride the market. 

This interesting graph below shows how fixed and variable rates have fared in the past few years:

rba historical lending rates

As per the stats released by RBA, in September 2017, the indicative lending rate for 3-year fixed owner occupier home loans was 4.10% p.a. compared to 4.45% p.a. for variable discounted rates.

For the same period last year, the variable rate was 4.50 percent and the fixed rate was 4.10 percent. At the beginning of the year, in January 2017, the variable rate was 4.50% while the fixed rate remained at 4.25%.

Clearly, the fixed as well as the variable rates have come down over the period, especially the fixed rate, as the RBA continues to maintain low cash rates for fixed periods. Compared to the variable rate of 6.10% and the fixed rate of 5.70%, in September 2012, five years back, it is indeed a drastic change.


What would you choose?

There is no doubt that the mortgage market in Australia is red hot right now; offering some great deals for new as well as existing home buyers.

Indeed, there is opportunity for fixing your mortgage at a great rate. However, fixing your home loan is a long-term decision, and quite a wager. Fixing your home loan at present will ensure you continue to enjoy the low rates – helping you budget better in the clear knowledge of how much you need to pay each month as your home loan repayment (calculate here). But on the flip side, you might find yourself paying more than the market rate apart from losing out on the flexibility that comes with a variable rate home loan offering free additional repayments and a connected offset account in most cases.

In addition, once you fix your rate for a certain period, it costs money to ‘break’ a fixed rate. If you decide to refinance or repay your home loan faster by making additional repayments during the fixed period, you would be charged break costs or exit fees by the lender that could run into a few thousand dollars.

It is true that no one can really predict which way the interest rates would swing. However, going by the fast closing gap between fixed and variable rates over the past few years, it could be worth your time and money to leverage the market some more. You could always opt for a split loan, partly fixing your loan to get the best of both the worlds. Use this split loan calculator to see how partially fixing your mortgage affects your finances. 

At HashChing, we have access to pre-negotiated home loan deals from over 60 lenders that you can compare online. Our mortgage brokers will be glad to assess your individual case, helping you make informed decisions. Get in touch with a mortgage broker now.

 
By Vidhu Bajaj
HashChing Content Writer
 

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