Home loan fixing – we get it right half the time

Whether you opt for a fixed or variable rate, the best option will often come down to timing.

With interest rates at record lows, it can be tempting to lock into a fixed rate home loan. But new research shows it’s a decision that doesn’t always pay off.

Research group Canstar crunched the numbers to see how often, over the past two decades, home owners were better off with a 3-year fixed rate home loan rather than sticking with a variable rate.

The results showed that, on average, fixing only put borrowers ahead financially 50% of the time – and even this level of success hinged on getting the timing right.

Canstar found for instance, that a home owner who opted to lock in the rate on a $300,000 loan in late 2005 would have pocketed savings of around $15,000 over a 3-year fixed term. That’s because the official cash rate steadily rose from 5.5% at the end of 2005 to 7.25% by August 2008.

However, choosing to fix that same $300,000 loan in mid-2008, would have left a home owner out of pocket to the tune of $20,400. In this case, the cash rate plunged from 7.25% in June 2008 to sit at just 3.0% by April 2009.

It all highlights how unpredictable interest rate movements can be. Of course, hindsight is a wonderful thing but even the economic experts can’t agree on where rates are headed in the future. So locking into a fixed rate is always a gamble.

The thing is, there’s more to your home loan than the rate you pay, and when it comes to features, fixed rate home loans typically don’t have the same level of flexibility as variable rate loans.

The ability to pay a bit extra off your loan, which is the key to clearing the debt sooner, is available with some fixed rate loans though usually with limits on how much extra you can pay. And I’ve seen a few fixed rate loans that offer offset accounts but these are the exception rather than the norm.

In addition, if you pay out a fixed rate loan early, you could face substantial break costs depending on how market rates have moved. And while you may not plan to pay off your loan ahead of schedule, something like a work-based relocation that sees you sell your home could change all that.

If you are thinking of fixing, Canstar says three years is the sweet spot for most home owners. It’s possible to lock in for longer, though this makes it even harder to predict how rates – or your personal circumstances – will change in the future.

Splitting your loan between fixed and variable portions can be a way of locking in today’s low rates, while still having access to flexible features.

 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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