Home loan interest rates are on the move. Lenders are offering discounted fixed rates. So should you stick with the variable rate loan, or move to a fixed rate loan. This is something you’ll have to decide for yourself, who knows where we are at in the interest rate cycle? See a list of historical Australian variable home loan interest rates from 1959 to 2012.

What Do The Gurus Think?

The general consensus in property investing circles is to stick with the variable rate. By switching to a fixed rate home loan you are making a bet with the lender that rates may go up. The major disadvantage of fixing rates is that you generally lose any flexibility you enjoyed with your variable loan. I suggest you stay with variable if selling in on the cards, but if you are sure you will be staying put, and think you will be able to make extra repayments, you could consider converting your loan to a “cocktail”, where part of the rate is fixed and part is variable. Then you could pay any surplus funds into the variable portion of the loan without penalty.

Flexible Home Loan

There is more to a home loan than the interest rate and the fees and charges. One of the most important things to consider is flexibility. What happens if you decide to move house, or borrow some money for renovations or investment, or need to reduce your repayments as the kids are at high school. If you have one of the no frill loans it generally won’t have a redraw facility and you may be required to take out a second mortgage for the extra money. Rates will come and go, but your main focus should always be to live within your means and get that home loan paid off as soon as you can. If you have a smaller debt, movements in interest rates will matter less to you.

• Be prepared to pay a higher application fee if you are buying a unit or property off the plan.

• If you plan to repay or refinance your loan within 4 years from the date of first loan drawing, you may also be slugged a “Deferred Establishment Fee”. This fee can vary from $700 to $2000 depending on the lending institution.

• Loan service fees: Usually $8 to $10 per month.

• Settlement attendance fee, usually $150 to $350.

• If you are changing lenders, you will also usually have to pay a security discharge fee of between: $350 and $1000 for the privilege.

• Be prepared to pay big if you want out of a fixed rate loan early. Lenders usually will not give any leeway to contract breakers. Picking the direction of home loan rates can be tricky. Just look at the historical rates for the last 50 years.

This is just a snapshot of the fees you can expect when taking out a new fixed rate home loan or changing from a standard variable home loan to a fixed rate home loan. Be sure to get a comprehensive list of fees from your lender or mortgage broker before you sign on the dotted line.

Should I lock the rate on my home loan?
This is an interesting question, and given the recent press leaks from the experts on what we should be paying for our home loans, it seems rates are unlikely to go lower. Even the RBA seems to have joined the: rates have bottomed chorus, so we are likely at the bottom of low rate the cycle. So maybe it is worth doing your sums on a rate lock.

Check with a reputable mortgage broker what rates are on offer before you jump, you may be wise to kick your old bank to the curb and find a new lender.

The main benefit of a rate lock is certainty. You will at least know what you have to pay for the period of fixed rate you choose. You may also be getting a jump on the banks, as they are likely to increase rates further if they think the market will handle it.

The downside is if rates drop further. Check out the history of rates for the last fifty years.

And finally check your loan statements, banks make mistakes every minute, make sure you are not getting ripped off. Click here for more info on loan checking software.

My thoughts are no! If you are in a panic about rates, I still say no. If you simply must fix, fix a portion of your loan, not the lot. How will you feel if rates go down to 2% after you have fixed at 6%. There are lot of folk who have fixed at 8%, they now find it very expensive to refinance. I say remain flexible if you can.

My gut feel is that a lot of borrowers are enquiring about fixed loans and the Banks and other major lenders are simply taking advantage of the demand. They all have plenty of cheap money from over seas and from the Government deposit guarantee. First home owners may consider a fixed loan, as it will provide certainty for at least a five year period and give them a chance to accumulate some equity.

Before you take a fixed rate loan, be warned that there is devil in the fine print and a hefty cost if you decide to refinance your loan before the fixed term expires.