Admiral Home Loans

Possibly the most common question asked by Home Loan applicants is “should I fix the interest rate for a period of time or go ahead with a variable interest rate?”

All applicants ask this question.

A very small minority have already made the choice before I meet with them. The may ask because they have never had a Home Loan before or because they have had a loan and feel they made a bad choice of interest rate type previously. Others have done well previously but have perceived that this time, the financial or employment environment is different.

The range of options are this; fix the whole loan OR have the whole loan variable OR choose a mixture of some of the loan on Fixed rate and some of the loan on variable rate. I have had some clients have some of their loan amount on fixed for say three years and some on fixed for maybe five years.

The truth is there is no one right way for all people for all seasons.

The accuracy of what is best, has as much to do with an individuals forecasting of the economic and interest rate cycle as it has to do with their forecast of future family and financial situations. Often over-arching that is how it makes them feel to be ‘locked in’ for a period of time on a fixed rate versus how it makes them feel to be ‘vulnerable’ to the vagaries of variable rates.

The best solution is to have a frank discussion with your mortgage broker where you gain from the brokers industry insight and combine that with your sentiment of hows things are now and how you think they will be over a period of time.

My current sage advice is summed up in these short sayings; “how things are now is not how they always will be” as well as “it was only two years ago when the popular interest rate sentiment was that rates would continue to ‘go through the roof’ yet it was only six months later that we experienced the lowest interest rates in over 40 years and now only nine months after that, that we have had three interest rates rises in 5 months”.

There has been some articles that have mentioned that borrowers who stay on a variable interest rate for the life of the loan term will pay less interest than those who choose to fix their interest rate. The benefit is obvious because people tend to ‘lock in’ out the emotion of fear, where those who choose (and stay) variable tenddo so out of an emotion of optimism. The risk of such a strategy is that it is easy to choose variable when rates are low(er) but when they get high(er), they then lock in on a rate that is higher again and thus commit to several years of high rates. Then if they do want to get out part way through that high rate period, they find they are in for multiple thousands of dollars in  penalties to break the fixed rate loan. Yes, that penalty can also apply if the borrower is selling and paying out the loan. 

Please email your specific scenario/request to me brad@admiralhomeloans.com.au