To fix or not to fix your home loan

IF you're thinking of fixing your loan to offset rising interest rates, the chances are it could be too late.

To fix or not to fix your home loan

IF you’re thinking of fixing your loan, the chances are it could be too late. Like variable home loans, fixed rates have risen in recent times and the chances are, you might not save anything at all by locking in the rate on your mortgage.

Indeed, a fixed loan could cost your more in interest than if you stuck to a variable loan, especially if you take up a discounted variable loan. And if interest rates do eventually fall, you won't benefit.

Fixed-rate loans accounted for 23.5 per cent of all home loans taken out in December, according to the Australian Bureau of Statistics. The proportion of loans fixed is well up from the 16.6 per cent average in 2006 and is twice the historic average, according to Westpac Bank.

You will only achieve an interest-rate saving with a fixed loan if interest rates keep on rising during the term of the fixed loan.

But the best time to fix is before interest rates start rising. Given interest rates have already risen seven times in two years, and 11 times since June 2002, the best time to fix is probably behind us.

If official interest rates fall, you may be left with a higher fixed interest rate than prevailing variable rates. And that’s a real possibility with interest rates falling in the US. That drop in borrowing costs could eventually spread to Australia. Maybe not this year, but rates might fall next year or the year after.

If you're in the market for a mortgage, a variable interest rate mortgage may still be a cheaper option than a fixed loan in the long run, especially if you opt for a basic variable-rate home loan.

According to data from the Reserve Bank of Australia, average interest rates on discounted variable home loans were 8.1 per cent in Janaury 2008.

That was cheaper than the average on three-year fixed rates of 8.45 per cent.

But if you like certainty, a fixed loan could still be for you. You may pay for the certainty of knowing your loan repayments won't go up, but at least you have that security.

But you also need to be aware that it may be very expensive to exit a fixed loan. Banks usually limit extra repayments on fixed loans (which could otherwise help you to reduce interest costs) and fixed mortgages may also limit or attract high rates for redrawing.

Most fixed loans don’t have offset facilities, which are common on variable loans and allow you to cut interest costs substantially by allowing the balance in your savings account to offset your home-loan balance, thereby cutting interest charges.

If you do want the security of fixing your loan, but don't want to take the risk that rates will fall, then splitting your loan into fixed and variable portions could be a good idea. That way, you can balance your risks and get some certainty into your home-loan repayments.