How a fixed-rate mortgage could save you $160,000

Interest rate rises are causing mortgage stress – but a financial adviser has one tip for anyone who wants to save a lot of money.

Off the back of the Reserve Bank of Australia’s (RBA) first interest rate rise in over a decade, rising mortgage costs have many Aussie property owners on edge. And for good reason.

After record Australian borrowing levels, record low interest rates, and staggering property price growth over the last couple of years off the back of the Covid pandemic, many mortgage holders are feeling more exposed than ever before.

ABS data shows the average mortgage size in NSW is $805,675. On this size mortgage over a 30-year term, a 1 per cent increase in your mortgage interest rate means an increase to your repayments of $449 per month, equating to an additional $161,746 in total interest over the life of your loan.

You can see from these figures that it can pay off in a serious way to get your rate choices right.

But in light of the recent interest rate rises and with more on the cards, is now the right time to take out a fixed interest rate mortgage? And how do you best prepare yourself for the interest rate rises that will eventually kick in?

Beating the banks is hard

In Australia, the banks have huge teams of analysts, economists and market experts who are constantly focused on how the bank should price their fixed rate mortgages to ensure they remain profitable for the business.

In terms of the basics on how these mortgages work, it’s worth noting the banks are generally looking to price them so they make the same amount of money whether a customer uses a fixed rate or a variable interest rate mortgage. They don’t always succeed, but history shows us that the banks get it right more often than they get it wrong.

The implication is that it’s really hard to ‘beat’ the banks when it comes to fixing your mortgage. But fixing your mortgage isn’t just about beating the bank. There are some significant advantages that come when you fix your mortgage.

With a fixed mortgage, you have certainty over what your mortgage repayments will be for a set period of time. This gives you the ability to make a clear, informed decision about your mortgage and the other things you do with your money outside of your mortgage.

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Fixing your mortgage can give you more certainty on what money you will have.. Picture: NCA NewsWire / Luis Enrique Ascui

This can give you peace of mind and go a long way to reducing stress around your ability to comfortably fund your mortgage payments and do the other things you want with your money.

Having a fixed-rate mortgage should also give you a lot of confidence to follow through on other investment strategies outside your property, like buying shares, investing through super, or building your emergency fund or cash savings.

Rate rises have been priced in

As it sits today, the banks have seen the writing on the wall around rising interest rates and have priced some of these rises into their fixed-rate mortgages.

According to recent data from Finder, the current average fixed rate is 4.06 per cent compared to 3.33 per cent for the average variable mortgage interest rate. This means if you’re thinking about fixing your mortgage, you need to be prepared to pay a higher rate in the short-term.

So how do you figure out whether fixing your mortgage is the right move for you?

Step 1: Understand the costs of fixing your mortgage

The first step in going down this path is to look at what it would cost if you were to fix your mortgage tomorrow. You can use an online comparison site, or chat to your mortgage broker or bank to confirm what your new monthly mortgage repayments would be.

Step 2: Assess how this fits with your budget

This next step is an obvious one, but there are some mistakes people make here that can lead to trouble. Take the time to unpack your budget and savings plan, what money you have coming in, what’s going out, and what’s left.

In doing this, you’ll want to make sure the spending side of things is rock solid. It’s common for people to forget about expenses that are important to them, which can give you a false sense that you have more money left than you do in reality.

Take the time to think through the less frequent expenses you spend on, car and home maintenance, medical costs, travel spending, and anything else that’s important to you so you can make sure the money is there for this spending when you want it to be.

Then it’s time to look at how much you have left for saving and investing. This money is what will drive your wealth-building progress over the coming years, so you’ll want to have enough to hit any goals or targets you have in mind.

Interest rate rises have caused some uncertainty in the property market and anxiety among mortgage payers. Picture: NCA NewsWire/David Swift

Once you’re confident in your numbers, you can then look at the impact of changing mortgage costs. Look at your mortgage repayments if you were to fix and how this fits.

In addition to just looking at the impact of a fixed rate, you should also stress test your variable rate, looking at how your monthly mortgage repayments would change if your interest rate was to increase by 1 to 2 per cent.

Based on the outcomes you find in going through this process, if it seems like fixing your mortgage would create financial pressure, you should tread carefully. But, if you look at your rising variable rate scenario and this puts you under pressure, looking to fix some or all of your mortgage might be a more comfortable path forward.

Make your move (quickly)

The mortgage market moves quickly, meaning the interest rates you can access today may not be there tomorrow. Interest rates today are on the way up, so if you make the decision to fix your rates you should take action promptly to lock in what’s on the table.

The wrap

Having a fixed-rate mortgage can sometimes save you money, but they always give you certainty. This path isn’t right for everyone, but with record borrowing levels and interest rates on the way up it’s something worth looking closely at.

Fixing your mortgage is a decision that will impact your financial position for years into the future, so make sure you plan smart and get help where needed.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, and author of the Amazon best selling book ‘Get Unstuck: Your guide to creating a life not limited by money’. www.getunstuckbook.com.au

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.