Home Mortgages Should I Fix My Mortgage Rate?

Should I Fix My Mortgage Rate?

written by Shelley Marsh 03/10/2013
fix mortgage

How freakin fabulous would it be to know the future?  I am sure you are the same as me, I did not see coming half the things, both good and bad, that have happened to me.  No one can predict the future.   The same goes for interest rates.  The finance gurus can tell you what they think will happen with interest rates, but when it comes down to it, the reality can be quite different.  However, with interest rates in Australia at historic low levels of 2.5%, it is not an unreasonable to ask “Should I fix my mortgage rate?”   So here are some of the things you need to consider if you are thinking about fixing your mortgage rate.

The biggest benefit of fixing your mortgage rate is that it gives you certainty.  Most likely your mortgage is one of your biggest expenses, with a fixed rate you know exactly what you will be paying month in, month out, during the term of the loan.  But with the benefit of certainty there is a cost and here are the 4 major disadvantages that you need to be aware of when fixing your rate:

  1. Fixed rate loans have a higher interest rate than variable ones.  The key to seeing whether it is worth it, is to figure out, how far interest rates have to rise before paying the fixed rate makes sense.  For example I took a quick look and found a 5 year fixed rate loan at 5.16%.  The variable rate from the same institution was 4.62%.  This means that interest rates would have to increase by more than 54bp for you to ahead on a fix rate loan, let’s call that 3 interest rate rises of 25bp?  Which overall does not seem completely out of the realm of possibility, especially if you are looking over a five year time frame.  Quite often, the difference between fixed and variable rates is much greater than this (say 1.2%) meaning that interest rates have to rise more substantially for you to be ahead.  (Also, remember, as outlined in my post ‘How to pay off your mortgage faster’ it picking the cheapest home loan is not just about the interest rate but you also need to look at the comparison rate.  Click here to see that post.)
  2. Interest rates could fall further and you will miss out on that benefit.
  3. Fixed rate loans often have a ‘break fee’ if you repay the loan early, for example if you sell your house.  This break fee can be very expensive (quite often more than $10,000!), so make sure you are clear on any fees before you decide to fix.
  4. Extra loan repayments are often not allowed when you fix your interest rate or you might be able to do so only after paying a fee.  Also, extra facilities such as an offset account may not be available with a fixed rate mortgage. Click here to learn more about offset accounts.

Nothing is forever and at some point interest rates will start to rise (this not to say that they won’t go lower first).  Everybody should prepare ahead of time and you should stress test your ability to repay your mortgage under higher interest rate levels.  Go to your bank’s website and figure out your repayments after adding a few percent to your rate.  Remember, just five short years ago, mortgage rates were around 9.5%, a big difference to the 5.5%ish most people pay now.  If you are already struggling with your mortgage or you feel you would be if interest rates rise, then fixing might be a great option for you.

Other strategies you could consider include fixing part of your loan and keeping part variable.  This gives you the benefit of both worlds.  Or you if you don’t want to fix you could look to increase your repayments to the fixed rate level, to build a repayment buffer to guard against interest rate rises.  This strategy gives you three benefits: firstly you get the benefits of staying on a variable rate mortgage (such as the ability to make extra repayments); you get used to repayments at higher rates so there is no shock when interest rates rise and lastly you have built a buffer to help protect against rate rises.

Just a quick warning, if you are considering fixing, it is difficult to get the timing exactly right.  This is because the funding for fixed rate loans is different to where banks source the funding for variable rate loans.  This means that fixed rates can move up significantly, long before interest rates actually increase.  Also, it is hard to get the timing right because interest rates might fall further than you expect.  However, if this prospect does not bother you and you prefer certainty then fixing might be an option.

The decision on whether to fix or not to fix is a very individual one.  Personally, we use our offset account quite heavily, so fixing our rate is not the right decision for us, at this time.  However, with rates at historic lows, and the difference between fixed and variable rates being quite small, whether to fix your mortgage rate is a question worth considering.  However, as always, make sure you do your sums and talk to your financial advisor to be sure it is right decision for you.

If you would like to find out more about mortgages please click below to see the following posts:

Home & Contents Insurance: How Do You Know If You Have Enough?

How To Pay Off Your Mortgage Faster

5 Websites That Will Make Or Save You Money

How To Use An Offset Account To Pay Off Your Mortgage Faster

How Interest Rates Impact You And Your Family

* Please note this is for your general information only and does not constitute financial advice.  Please see a financial planner or accountant to get advice specific to your individual needs

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23 comments

Leanne Winter 04/10/2013 at 7:30 am

Wonderful, easy to understand, no jargon information as usual, thanks Shelley. Personally, we’re sticking with the variable rate so that we can keep ploughing any extra money straight onto the loan. If rates go up at least we’ve brought the balance down a bit first.

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Shelley Marsh 05/10/2013 at 8:00 am

Hi Leanne, yes if you want to pay off your mortgage faster, quite often sticking with a variable rate is the way to go. Money Mummy

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Renee at Mummy, Wife, Me 04/10/2013 at 7:35 am

Thanks for the advice. I didn’t know that once you fixed, the interest rate would be higher. I’m definitely going to read your how to pay off your mortgage faster story later.

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Shelley Marsh 05/10/2013 at 8:02 am

Hi Renee, yes the fixed rate is always higher, but I find it interesting that the gap isn’t that big at the moment, unlike other times when I have looked. Money Mummy

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Marleisa 04/10/2013 at 9:17 am

I can’t wait for the day when I have paid off my mortgage!!! Bring it on!!

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Shelley Marsh 05/10/2013 at 8:03 am

Hi Marleissa, go for it girl! Most people think it is not possible, but it absolutely can be done! Money Mummy

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Emily @ Have A Laugh On Me 04/10/2013 at 7:28 pm

Such a tricky decision, we fixed at a rate we knew we could always service no matter what and it’s dropped A LOT since then but my hubby has assured me we’re not any worse off, I’ll have to trust the investment banker/financial adviser in him I suppose 🙂 xx

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Shelley Marsh 05/10/2013 at 8:06 am

Hi Emily, yes the timing of fixing is super tricky and really hard to get right. Like you said as long as you are happy with the rate and you can always service it, then you just have to not worry about what happens to rates after that. I had friends who recently fixed on that basis and they don’t care if they miss out on further rate cuts, but they know they will be protected from rate rises. Money Mummy

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Grace 05/10/2013 at 11:11 am

Great post, Shelley. Love how you’ve made it easier to understand what it means to have a fixed loan. Even better that you’ve listed all the things to look out for when making the decision to go fixed or not.

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Shelley Marsh 06/10/2013 at 6:45 pm

Hi Grace, glad I could help.

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Amanda @ Cooker and a Looker 05/10/2013 at 4:00 pm

I can’t imagine the satisfaction we’ll feel when, one day in the distant future, we make the last payment on the farm and it’s ours. Great tips Shelley!

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Shelley Marsh 06/10/2013 at 6:47 pm

Hi Amanda, I am looking forward to the day you write to me and tell me you are all done. It will happen, even if it seems far off now, you can definitely do it!

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Mums Take Five 06/10/2013 at 7:43 pm

Great Post. Interesting. we’re variable and i think we’ve been quite fortunate with it really. Will be nice not to pay it at all one day 🙂

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Shelley Marsh 06/10/2013 at 10:37 pm

Yes, we too have stayed variable and that has worked well for us because we use the offset account. Yes it will be nice to kiss good bye to the mortgage repayments! Imagine the cash that would be freed up!

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MRS AK 17/01/2014 at 11:42 am

Hi Shelly – Great website i have stumbled upon! Hubby and I fixed our mortgage for one year at 5.19% and the variable at the same bank was 5.64% so it worked well for us. Plus i love knowing the exact amt we owe every month as we continue to just pay thehigher variable amount we were use to.
After reading your website i have decided to take more advantage of our offset account. We have stuck to our budget for 3 years now which has allowed us a brand new home, 2 overseas holidays and a wedding – so i feel financially responsible enough now to ‘park’ our wages in the offset and then pay our bills when they are due and let the savings work off some interest 🙂 Thanks for the awesome website – Love a bit of girl power on money issues

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Shelley Marsh 20/01/2014 at 1:08 pm

Thanks so much! It means a lot to me that you took the time to leave a comment! You have made my day! Make sure you subscribe if you would like to read more – the button is in the top right hand corner of my site. Yes I totally believe in girl power when it comes to finance! Good luck with your offset account but make sure you ask your bank whether you will get interest savings given your mortgage is fixed. It always pays to check. Thanks for stopping by 🙂

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plantation fl townhouses 02/03/2014 at 6:45 pm

I enjoy reading through a post that can make men and women think.

Also, many thanks for permitting me to comment!

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Jessica 29/07/2015 at 11:21 pm

I split my loan into three parts. The first part was what I thought i couldn’t pay off over 5 years, fixed this, the second part was what I would have liked to pay off as extra but wasn’t sure I would be able to, also fixed this, but as a smaller loan so that if I wanted to end the fixed term early the EPIA (breaking cost) would be less, the third part was what I felt confident I could pay off as extra over 5 years, left this on variable. My bank allows $500/month additional payment into each fixed loan with no penalty. So, I pay $500 into each fixed loan each month ($12,000 a year off fixed loan principle) and every spare cent into the variable part, which also has a 100% offset account. And. The bank allows 10 sub-offset accounts. So I keep my money organised – school fees, groceries, annual bills, investment property expenses etc. all transferred weekly into the correct accounts, sitting there for when bills come in, and all reducing the interest on the mortgage account to which they are offset. I pay everything on the credit card and at the end of the month transfer from the various offset accounts. Once in a routine it’s simple and you always know how much money you have spare as everything else is allocated. Feeling very motivated as I see the loans constantly reducing and I know I’m making the best financial decisions that are ‘free’ for my family.

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Shelley Marsh 31/07/2015 at 6:56 pm

Hi Jessica, paying off your home loan is a fantastic goal to have and it sounds like you have a great system to make it happen. Well done!

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Oak Laurel 31/10/2016 at 3:05 pm

Hi Shelley,
Great article. Do you think that now is a good time to fix your interest rate. It is hard to believe that interest rates could get any lower but people have been thinking that for a few years now and those that fixed a couple of years ago lost out on price. I know that certainty and flexibility are also factors but what do you think based just on price?
Cheers,
Oak Laurel

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