A fixed-rate home loan might seem like a great idea when rates are low, or when rates are likely to rise, but the people who study these things say that in the long run you’re usually better off riding the swings and roundabouts of a variable rate.
In a recent study, the financial comparison website RateCity.com.au compared the average variable home loan rate with the average three-year fixed rate over the past 20 years.
It found borrowers were better off with the average variable home loan rate.
According to RateCity, borrowers had only a 3 in 10 chance (a 30 per cent chance) of saving money by fixing for three years in any given month between 1990 and 2010.
They were likely to save more money by staying with the average variable rate rather than the average three-year fixed rate.
Variable rates were 0.29 percentage points lower on average than three-year fixed rates over the past 20 years, it found.
In fact, borrowers who fixed for three years at the average rate could have missed out on as much as $30,000 in savings from rate cuts on a $300,000 home loan, it says.
Fixed-rate loans are still worthwhile considering if you’ve borrowed heavily or have limited resources and couldn’t cope with higher interest rates. If you’re a property investor, they offer more predictable cash flow.
But there’s little point trying to “speculate” on the direction of interest rates over three or even five years, because you’re unlikely to win that bet. Even the interest rate experts in the bond market don’t get it right all the time.
And if you try to get out of a fixed-rate loan because interest rates end up falling, not rising, you’ll face heavy “break fees” for terminating your loan contract early.
People who thought they’d done well locking in at 9 per cent in the boom days before the global financial crisis tried to exit after rates ended up falling to 5 per cent but the fees – which are based on the size of the gap between the old and new rates – were prohibitively expensive.
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