Is moving to a fixed rate actually better right now?

INTEREST rates are at record lows, with some economists predicting they will go even lower.

Consequently the papers are full of advertisements for cheap home loans. 

This asks the question of whether you should stick with a variable rate, or move to a fixed one.

It's a fact that more than 80% of people who took out fixed rates in the last 10 years would have been better off choosing with a variable rate.  This means the banks have been the winners in 80% of cases. Your chance of beating the banks is just 20%.

To get an idea of the type of loan that is most suitable for you, think about the next 10 years.  Most fixed rate loans are inflexible, and there can be heavy penalties for early repayment. 

Is it possible that you may change your circumstances in the short to medium term and change properties, or enjoy an improvement in your financial circumstances that would enable you to make extra payments on the loan?

One of the most valuable loan facilities you can have is an offset account. This enables you to park surplus monies in the offset account, guaranteeing an after tax return which is the same rate as you are paying on your mortgage.  Also, it offers you flexibility if your intention, long term, is to keep the original house as a rental and upgrade to a more expensive home. 

When this happens, the money in the offset account can be withdrawn to boost the deposit on the new home, leaving a large loan against the original home to maximise the negative gearing benefits when it becomes a rental, and the interest can be claimed as a tax deduction.

Very few fixed rate loans offer an offset account, and if they do the effective rate is lower than if you had a variable rate loan.

A great strategy is to build a safety buffer by making extra loan repayments, or by paying fortnightly. This is not possible with most fixed rate loans.

The message here is that choosing a loan is like choosing an investment product.  There is a lot more to it than the advertised rate. Think about flexibility and what features you need to cater for your own goals.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.
 



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