Recently some lenders hiked interest rates without waiting for the Reserve Bank to officially raise rates, prompting some borrowers to consider switching to a fixed-rate mortgage. If you think a 0.5% or 1% increase could hurt you financially, it might indeed be time to fix your mortgage at the current low rate.
Fixing your rate makes it easier to control your budget because you know what your payments are going to be every month for the fixed period – usually 1, 3 or 5 years. Because your rate can’t go up during this time, it’s a good option if you think you would struggle to make payments if lenders raise rates. (But don’t forget, with a fixed-rate loan, you need to be prepared that if rates fall, you will keep paying the higher rate.)
Variable-rate loans may be more appealing if your goal is to own your home sooner by making extra payments, which isn’t always an option with most fixed-rate loans. Also, if you’ve made extra payments and think you might need to redraw some of that cash, that’s usually not possible with fixed-rate loans.
There’s also more flexibility with variable-rate loans. For instance, if you find a better loan, it’s simpler and less expensive to switch than if you were on a fixed rate. Meanwhile, if you have a fixed-rate loan and sell your house and pay off the loan before the end of the fixed period, you may have to pay fees.
If you prefer to have a bet each way, you can choose a split loan, part fixed, part variable. Usually you can split it however you like, allowing you to balance the risks of a rate rise with the flexibility of a variable-rate loan.