Q. I have a variable rate home loan at the moment but I am thinking about switching to a split loan with half being fixed and the other a variable rate. My questions are: When is the best time to take out a fixed rate? How do you decide between, say, a three- and five-year fixed loan? Is it better to go with the lower rate for three years or take a slightly higher rate for a bit longer, like five years?
A. Ah yes… the $64,000 question. Needless to say, if I (or anyone else) knew exactly where interest rates would be in three or five years I probably would not be commuting to work by train every morning. Many people in the finance world believe that the banks set their interest rates so that at the end of a certain time period they would have received the same amount of interest from a borrower, regardless of whether the borrower has taken a variable, introductory, three-year or 10-year fixed loan.
The best time to take out a fixed loan is when the fixed rates are at their lowest. This depends, in part, on what the Reserve Bank of Australia determines the official cash rate to be. A number of leading economists also predict a reduction in the standard variable rate over the next 12 months.
Choosing between a three-year or five-year fixed rate depends on your long-term view and your long-term needs. Are you happy paying the same repayment for five years? Some fixed period loans do not allow any additional repayments towards the loan; others only allow $5,000 or $10,000 per year. This may be too restrictive for you.
Related: Home Loan Calculator