Your Home Loan – To Fix or Not to Fix?

With fixed interest rates on home loans at record lows, many are wondering whether now is the time to lock in a fixed rate. Usually, the consideration is whether or not you’re likely to save money through reduced interest costs by fixing. Such calculations require you to “guesstimate” where interest rates are headed several years out. As such, these calculations are tough, and in truth, there is just no way to accurately ascertain in advance whether or not a fixed rate loan will save you money in comparison to a variable rate loan. The answer will only be known in hindsight.

So when deciding whether to fix your interest rate or not, a better approach would be to assess the impact if interest rates were to rise. This you can do accurately. Between October 2009 and November 2010, interest rates rose 2%, so let’s use that as an example of what could happen in a rising interest rate environment.

At present ANZ (as an example) promotes their variable home loan rate at 5.98% (comparison rate). If your mortgage was $250,000, with 20 years to run, your monthly repayments would be $1,788. If rates rose by 2%, monthly repayments would become $2,088, an almost 17% increase.

When deciding whether to fix your interest rate or not, the key thing to consider is whether such an increase will cause you financial distress. Is that extra $300 per month affordable? Fixing your interest rate should be thought of as insurance. You take it out if in your assessment the consequence of doing nothing is potentially financially painful.

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.