Should I fix my mortgage?

17/01/2012


Question: I am in the midst of purchasing my first property but, with all the talk about interest rates possibly rising in the long term, I am stuck between choosing a fixed or variable interest rate loan. My annual income is $90,000 and I am looking to purchase an investment property at about $600,000, with a monthly mortgage repayment of just under $4,000. Am I likely to end up paying more for my mortgage in the long run under a fixed interest rate loan set-up, than if I choose a variable interest rate? How much leeway should I give myself for potential interest rate rises, should I choose the variable interest rate option? 

Answer: Thanks for your question and congratulations on purchasing your first property. I understand what an exciting time it is for you. You are right, deciding between Fixed and Variable Interest rates can be difficult exercise. This is something that a lot of investors are confronted with and it does tend to cause some confusion. The good news is that there is a simple way to look at it.

The key is to understand what each option does for you. Naturally, it can be easy to focus on the rate and decide on that basis then realise later that what was really needed was flexibility. What do you want and expect from the loan you are applying for? Do you want to feel safe and secure knowing that you are protected from any sudden changes in the interest rate? Do you want to reduce the loan as fast as possible? How long will you be keeping the property?  These are the sort of questions you can ask yourself so that the decision you make is in line with your requirements from the outset.

History suggests that variable loans will outperform fixed rate loans in the long term however the option you choose should suit your situation rather than the desire to keep the cost down. By comparing fixed rates with variable rates you are betting that you will have the property for the long term. If for example you sell it in three years’ time, then the short term certainty of a fixed rate can outweigh the long term benefits of a variable rate.

It’s also understandable to wonder about the overall cost of the mortgage, though in reality the loan cost is tied up in the actual purpose of the property itself. By that I mean that what you decide to do with the property and how long you keep it will impact on the cost of the loan.

It’s also interesting to note that a fixed rate is not designed to save you money. Its purpose is to give you security in the form of fixed repayments for a given period of time. You have no surprises each month and this certainly assists budgeting purposes and cash flow.

In my experience it’s unlikely that you will stay with one lender either, as your circumstances and investing potential will improve over time, providing more options. Good luck with your purchase.

  • Answer provided by Vincent Power, Mortgage Solutions (www.investorsdirect.com.au)

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