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15 Jul 2021

Should I get a fixed or variable mortgage?

By Damon Frith, content editor for Citi Interest rates are going to be low for a long time, but there are a number of factors to consider when choosing the mortgage that's right for you

The best time to buy a home is when you’re ready, but certain events like a movement in interest rates may change your timing. An event impacting rates that is likely not on your radar is the nation’s savings rate.

A consequence of the uncertainty generated by COVID-19 has been increased household savings. It was 18.9 per cent in the June quarter this year, compared to 5.3 per cent in January 2020 when the pandemic started to surface, according to Australian Bureau of Statistics (ABS) data.

It has led to an influx of funds to banks from higher savings, and the banks need to deploy those funds to generate earnings. A premium channel for lenders is mortgages, as it creates a long term income stream, and has capacity to soak up significant amounts of increased savings.

It means there is a lot of competition for people’s business, which is great news if you’re looking for a loan, and particularly a large loan like a mortgage.

Its adds to the brightening outlook for those seeking to buy residential property for these reasons:

  • House sales were subdued during the worst of the pandemic, so there is a build-up of sellers.
  • House prices are trending upwards again but have not reached average prices pre-pandemic, except in NSW.
  • Led by NSW, some state governments are reviewing how stamp duty can be applied in a more flexible way for home buyers.
  • Interest rates are at an historical low and mortgage providers are offering competitive rates.


The last point raises another issue, is a fixed or variable mortgage better?

Each has advantages, and fixed rates at some institutions have recently fallen below 2 per cent for the first time.

A fixed loan means you know the interest rate you will have over the fixed period of the loan, providing certainty over the payments that will be required. You also benefit if interest rates rise, as your repayments remain the same.

Variable loans, also known as floating loans, mean your interest rate can vary if official interest rates set by the Reserve Bank of Australia rise or fall. A change is not guaranteed, as it will depend on others things like a bank’s funding costs. Generally, variable rate loans are a good idea if you think interest rates are going to fall, as it will likely result in a reduction on your loan repayments.

Typically, you will choose to fix or float a loan for a term of 6 months to five years, even if your mortgage term is 30 years. At the end of term you can again decide which option will suit you best, meaning you can take advantage of changed economic or personal circumstances. Depending on your provider, you may also be able to split your loan into portions of both fixed and floating.

Generally, people get a fixed term if they believe interest rates are going to rise, or they simply prefer the security of knowing how much their payments will be.

A graph showing movement of fixed housing interest rates of 3 year maturity product for period 1995 to 2020

Source: Bank' websites, CANSTAR, RBA, Refinitiv to September 2020 - *available to owner-occupiers

Variable rates are better suited if you think official interest rates are going to fall, as you will expect to get a lower rate on your loan if the Reserve Bank of Australia (RBA) cuts rates, although it will also depend on other things like your providers funding costs, and a cut is not guaranteed.

A graph showing movement of housing interest rates outstanding loans and new loans for period 2015 to 2020

Source: APRA, banks' websites, CANSTAR, RBA, Securitisation System to September 2020

Currently we are in an unusual space. In order to provide some stability in a period of considerable uncertainty, the RBA has made it clear in numerous speeches that it does not expect to cut interest rates past the present historic low of 0.1 per cent, but also it does not expect to raise rates until at least 2024

The RBA’s commentary cannot be taken as certain, as it will respond to any unexpected changes to market conditions, but it does provide a degree of guidance.

The conundrum for those with or seeking a mortgage is if rates are unlikely to rise or fall, do you fix or float, or take out a combination both with part of your mortgage fixed and part variable?

There is no set answer to this question, because if security is most important to you it maybe the over-riding consideration to fix. For others, the slightly lower rate lenders normally provide with floating rates may be the primary consideration.

What we know without question is that interest rates have never been lower and competition amongst providers is high, putting you in the driver’s seat to get a great rate if seeking a home loan or to refinance an existing loan.


Home Loan Solutions

Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.

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