Fixed vs. variable mortgage rates?

Question

What are the criteria I should use to choose between fixed and variable mortgage rates when buying a new home?

Answer 1

Usually fixed rates are higher than variable ones.  If you think that the rates are generally going down, you should opt variable rates so that you can refinance when they go down.  The flip side is that if/when they go up, you end up paying more.

Now-a-days the difference between the two is not very substantial.  So I would prefer a fixed rate, as it gives best of both worlds - a rate as good as variable and a chance to refinance if the rates really go down.  In other words, potential upside with minimal risk./

Answer 2

It all depends on how you plan to pay off the loan.  If you're going to get stuck in and want the debt cleared in 5 years, then you'll most likely want a variable interest rate loan.  They usually allow you to pay the loan off way ahead of schedule, without negative repercussions.  The only downside is that when the Reserve Bank raises interest rates, your variable rate goes up.  But if you time it well, and rates go down, you'll find the rate on your loan going down too.  It's just a gamble you have to take.

If you choose a fixed rate mortgage, usually you can only make extra repayments per year up to a limited amount.  If you're looking to pay your home loan off over a long period of time, then fixing it at a low rate is a good idea.  However, you should be careful when you get the loan. If rates are at a high level, like they are in Australia, where I am, it would be very foolhardy to fix your rate at a high rate and be paying that off while everyone else is enjoying lower rates in a few years.

Another option is the cocktail loan.  That's where you keep part of the loan on variable rate, and part of the loan on fixed rate.  That gives you the opportunity to pay extra off the loan (up until you've paid off the variable portion) but also means that at least on part of your loan, you're interest costs will be predictable.

You should go and speak to a mortgage broker about what kind of loan you are looking for.  A broker in your area will have a better idea of the financial conditions in your part of the world.

Best wishes