This is one of the most asked questions of a mortgage broker – should I fix the rates, stick with variables rates or split and do a bit of both?

There is no easy answer nor is there a right or wrong answer as it is a decision that must be made by the borrower based on their own circumstances and comfort levels.

Fixed Rates

Having a Fixed Rate with your home loan means that you will know exactly what your home loan repayments will be for the nominated Fixed Rate period – which is usually for 2 – 5 years but can be as long as 15 years with some lenders! During this time, the loan repayments will not alter regardless of any changes in the variables rates offered by that lender.

People tend to go to Fixed Rates because they like to be in control of their finances and know exactly what their home loan repayments will be over a period of time. This does allow for better budgeting but can come at a price if rates do not move in the direction that you expected.

Another downfall that a lot of people are not aware of is the fact that if you start paying above your scheduled repayments, you could end up being hit with break costs by your lenders. Most lenders allow a certain amount of additional payments on a home loan but it does vary from lender to lender and quite significantly. Some lenders allow for a certain amount to be paid over and above the normal amount and look at this over a 12 month period but there are others that simply look at it month by month do depending on who your lender is, you may be allowed to pay an extra $10,000 per year or as little as $500 per month.

Break Costs can also be significant if a borrower on Fixed Rates also decides that they either need to refinance because of changed personal circumstances or because they would like to switch to variable rates and this needs to also be factored into the decision making.

Variable Rates

With variable rates, the interest that you have to pay will vary from time to time in line with movements in the variable rate offered by the lender. Traditionally, rates only varied in line with changes in the Official Cash Rate set by the Reserve Bank but over the last couple of years, lenders have changed variable rates independently of the Reserve Bank.

Combination

The Split Rate Home Loan gives you some of the benefits of both Fixed Rate and Variable Rate loans. It is like having an each way bet. You won’t save as much as a full Variable Rate loan if interest rates fall, but neither will you be as exposed if interest rates rise.