Choosing the right loan for you: To fix, or not to fix?

By Pia Vogel
Great news.  We now have the lowest interest rate we've had in a while.  And while this raises some debate on the state of our economy, this is a great opportunity for the many mortgage holders around Australia.
To start with, the news is already full of advice about what you – the mortgagee - should do.  You’re being encouraged to shop around and either switch or ask for discounts on your current loan rate.  
For most of us this is a hassle.  One of the biggest reasons people have not taken advantage of the ability to ‘switch’ mortgages more easily and without penalty is pure inertia.  
But if we deal with our mortgage as we should any of our finances, as a logical rational business decision – we should put some energy towards analysing what our options are and what’s the best path.  
And one of those options especially now is whether to select a fixed or variable rate mortgage.  Which one you choose depends on your finances, the features you need in a loan, how long you plan to own the property and the current market.   Also consider – are interest rates likely to reduce further or is this the bottom and it’s all up from here?  
Here’s a basic run down of the differences between the two to help you on your way. 
But before you make any big decisions don’t forget to seek professional advice.  Here at HomeSource we offer a specialised lawyer service which is very affordable.  We are also now working with an accredited financial planner who can offer you his expertise should you require.  
Fixed loan
A fixed rate mortgage is exactly that – the interest rate is fixed for a specific period of time, usually one to five years. The benefit of a fixed mortgage is that your monthly repayments remain the same so you can accurately budget and plan your finances with a degree of certainty and security. By locking in a fixed rate you will be secure in knowing that your payments will remain the same should interest rates rise. 
However there is a downside too - this loan is usually more restrictive in making extra repayments to clear your mortgage sooner, and if the market rates decreases you will not reap the benefits of lower payments as you would on a variable mortgage. 
Variable loan
A variable rate mortgage will vary according to various market conditions. This loan offers a variety of features and flexibility, but can be risky option, especially in a rising interest rate market. Variable mortgages are the most popular in Australia and are attractive to many, because they usually offer a lower rate than a fixed rate mortgage. 
The uncertainty is that, interest rates repayments can change at any time - if rates increase, then your repayments will rise along with them. However if they drop, you will be laughing all the way to the bank as, your mortgage repayments will reduce too. 
If you are in a position to make additional repayments onto top of your monthly repayments then a variable rate loan may be best option for you.  Every extra payment you make can help reduce the term of your mortgage and increase the amount of equity in your home. 
Is it possible to have the best of both worlds? 
Some banks offer a combination loan which allows you to combine the two loans. You get the security of a fixed rate with the flexibility of a variable rate loan. You choose how much of the loan you want to split between fixed and variable and you also have the option to make additional payments to pay your loan off sooner. 
So now you have the facts, the big question is which loan suits you best? The key is, don’t forget to prepare, research, and talk to experts that can help you!