Fixed versus variable home loans: the tide is turning quickly

Sharp rises in fixed interest rates for mortgages are making borrowers think twice about locking in before Reserve Bank rate rises.

Fixed home loan interest rates are climbing, and weakening the argument to lock in mortgage repayments.

Most variable-rate loans are now cheaper than fixed, and could stay that way for a while after a boom period for fixed rates that saw them surge from 15 to 44 per cent of new loans in just two years.

Big banks and other lenders have lifted fixed rates in the past week and Steve Mickenbecker, group executive financial services for research group Canstar, says it’s a “tough call” whether to fix or not.

“If you fix for three years now you will pay between 0.8 and 0.95 per cent more for a fixed-rate loan than for a variable rate loan,” he says. And for five-year fixed rate loans the difference is 1.3-1.5 per cent at the major banks.

Canstar’s Steve Mickenbecker says there are big differences between fixed and variable rates.

This makes it a gamble because the Reserve Bank of Australia may not lift its official cash rate – which drives variable rate loan pricing – for a year or more, and nobody knows how many rate rises it will make.

“If the cash rate increase is a year away and variable rates take another year to rise 1 per cent, borrowers will likely have paid away the benefit in higher immediate interest costs,” Mickenbecker says.

He can’t see fixed rates dropping again soon as the world is now in a rate-rising cycle.

Mickenbecker says fixing still appeals to people who want certainty, but it often means trading away flexibility around extra repayments, offset accounts and switching.

Splitting your loan – perhaps half variable and half fixed – may deliver the best of both worlds and Mickenbecker says “most lenders do offer that facility”.

Comparison website Mozo.com.au’s spokesman Tom Godfrey says there have been more than 2800 fixed rate increases by lenders in the past three months.

“While there is still a small window to consider fixing a decent medium-term rate, I wouldn’t be holding off too long as lenders are not waiting for the RBA and are already hiking rates,” he says.

People planning to sell their property or refinance in the near future may be better off with a variable-rate loan because of its flexibility, Godfrey says.

“If you’re looking for predictable payments and are comfortable with your current monthly costs, fixing is worth considering.”