Home loans – to fix or not to fix?

It is said that Aussies will bet on anything – even two flies crawling up a wall. Our bets have become a bit more sophisticated and now it seems the latest “bets” are taken between economic commentators on what the Reserve Bank of Australia (RBA) board will do to the cash rate on the first Tuesday of every month. The betting odds are pretty low so it won’t be commentators who will lose too much; it’s the mortgage holders who have more skin in this game.

However, while the economists monitor the manoeuvrings of the RBA, the banking regulator, the Australian Prudential Regulation Authority (APRA) has made the lending rules major banks must follow a bit tighter. One effect from this decision is an increase in interest rates to both investors and home owners.

So is it now time to take action?

Well, regardless of whether rates are going up or down, before you act, carefully consider both sides – the advantages and disadvantages of fixing your interest rate.


Although the obvious advantage is that when you fix, repayments will not increase with rising interest rates, this hasn’t been the issue over past years, but with bank-driven increases this advantage is again becoming reality. You know in advance what your repayments will be for the fixed period, and you can usually choose terms of between one to five years. This helps to remove the guesswork.


Clearly the biggest disadvantage is what happens if rates continue to drop – borrowers who fixed when the cash rate hit a then “historical” low in 2013 at 2.75% are now paying more than if they’d waited. Rates were originally reduced with the hope of reinvigorating the overall economy but even the experts couldn’t have foreseen that the expected growth wouldn’t follow. Instead, the biggest consequence has been the skyrocketing house prices.

Another downside of a fixed interest contract is you may not be able to make extra repayments and there is usually a sizeable penalty for paying out your mortgage earlier or breaking your contract. This must be factored in.

It’s obvious that the usual economic rules don’t seem to be working (and the banking rules have changed), so there is no recent precedent to rely on with regard to fixing.

Still, with the cash rate so low, some lenders are offering fixed rate mortgages close to or even lower than the standard variable rate, although many come with terms such as applying to new customers only. If you’re thinking of refinancing to reduce your repayments even further, read your loan documents carefully to make sure it’s worth it.

So if you’re thinking of changing to a fixed rate, think carefully, read the fine print and do the sums. Life is about choices and nobody should make this decision for you. In the meantime keep paying your mortgage off regularly and make additional payments when you can.