To Fix, Or Not To Fix

Fixed vs Variable

“Fixed or variable?” is a question that we receive on an almost daily basis.

There really isn’t a simple answer because nobody can predict the future of interest rates.

Ultimately, you have to choose between fixed and variable rates based on your short-term and future plans.

When is a fixed rate a bad idea?

A fixed-rate works in a different way to a variable rate home loan. Typically speaking, a variable rate home loan allows unlimited extra repayments, compared to a fixed rate which, most of the time has limits on how much you can repay. Most fixed rate products do not allow offset/redraw facilities.

Generally, don’t fix your loan if;

  • You need to make extra repayments to your loan
  • You plan to sell your property within the fixed rate term
  • You plan to renovate or build a new home within the fixed rate period
  • You don’t like being locked in with a particular lender or loan product.

What restrictions do fixed rate loans have?

Fixed-rate restrictions vary from lender to lender.

Here are some general restrictions (please consult your individual lender or us);

  • Your extra repayments are typically limited to $10,000 p.a
  • You cannot use an offset or redraw facility (there are some lenders that allow a 100% offset account attached to a fixed rate loan – contact us for some more information)
  • You may pay significant break or exit fees if you make extra repayments, sell the property, refinance to another lender during the fixed rate period

As mentioned previously, all lenders are different, so please contact your lender for specific terms and conditions.

What are fixed rate break fees?

If you make a large loan payment, switch back to a variable rate or close your loan account, then you may need to pay a fee to the bank for breaking out of the fixed rate contract.

These fees are known as break fees, an early repayment adjustment or an economic cost.

WARNING: Break fees can be very significant, and change on a daily basis.

How do I calculate my fixed rate break fee?

Fixed-rate exit fees are calculated by working out the difference between wholesale rates between the time when you applied for your mortgage and when your loan is repaid.

For example:

  • You fix your rate for 3 years at 4.00% p.a
  • 2.5 years down the track you need to break your fixed rate, and the current fixed rate offering is 3.00% p.a

You need to pay the 1.00% difference for the remaining 6 months of the fixed rate loan term.

However, if the current fixed rate offering is higher than your existing fixed rate, commonly no break fee will apply, because the lender will actually make money from your paying your loan off early!

Each lender has their own specific method of working out the fees that they will charge you and it should be listed in your loan contract/loan offer.

How much should you fix?

You don’t need to fix 100% of your loan, you can explore a split loan, which allows you to retain a portion variable which you could utilise to make extra repayments.

You should try to calculate how much you’re likely to pay off your home loan over the fixed rate term and then keep that portion of your loan variable. This allows you to make extra repayments on the variable rate portion without incurring any break fee penalties.

It’s common for our customers to fix their entire loan if they are a property investor, as most of them do not make additional repayments on their home loan.

However, if they are fixing the loan over their home, it’s more common for them to fix only a portion of their loan to allow them to continue to retain flexibility and to have an offset account linked to the variable rate portion.

There really isn’t a simple answer because nobody can predict the future of interest rates.

What happens after your fixed rate expires?

Fixed-rate terms vary from anywhere between 1-5 years (some lenders offer longer terms).

Once your fixed rate term expires, typically speaking, your loan will revert to a variable rate loan.

Don’t be surprised if your variable revert rate is high. Lenders know that commonly, most people never review their home loans. It is very important that you review your variable rate post your fixed rate period OR explore further fixed rates.

Call us before you fix!

We are here to help our customers for the life of their loan. If you’re one of our existing customers, please speak to us before you fix.

If you’re not yet a customer of Mortgage Choice, we can also assist you with general advice and refinancing if needed.

We can help you make a decision on fixed or variable.