Fixed Vs Variable What's The Best Choice Right Now

It wasn’t the early Christmas present we were all hoping for.

💸 Unfortunately, the RBA decided to increase the cash rate for an eighth consecutive month last week, meaning Aussie homeowners are left even more out of pocket over the holiday season.

🤔 With my fixed-rate period ending in the middle of December, I’ve had to make a decision about whether to let my home loan shift over to a fully variable rate, or try to fix it again. Here’s what I decided to do, with advice from my mortgage broker.

Interest rates have risen for eight consecutive months, with more pain on the horizon in early 2023.
Mortgage holders are paying thousands of dollars more every month compared to this time last year.
My broker advised me to “ride the variable wave” as it wasn’t cost-effective to fix again at the current rates being offered. Your broker may say something different though.
This is the new norm for interest rates – we aren’t going to see a return to historically low rates anytime soon.

Fixed versus variable: What’s the right decision?

When my wife and I bought our dream home in late 2020, we were lucky enough to be enjoying some of the lowest interest rates this country has ever seen.

We ended up splitting our loan across both fixed and variable, with the bulk of the loan being fixed for two years. Little did we know what the market would look like just a couple of years later…

📈 The RBA’s latest cash rate rise to 3.1% means we’ve been hit with rising interest rates for eight months in a row.

⏲️ If you believe the experts, we’re in for more pain in the first half of 2023 before rates hopefully plateau in the middle of the year.

💲House prices are going down in major cities across Australia, especially in Sydney and Melbourne.

😨 More than 40% of homeowners were on a fixed rate in 2021, but now the majority are on a variable rate – leading to repayment shock.

Be aware: A $1 million mortgage with 25 years left on the loan is now $1,668 more expensive per month than it was this time last year, thanks to this year’s multiple rate rises.

What do the experts have to say?

My first port of call was to speak to my mortgage broker, the amazing Melissa.

Here’s what she had to say not just about my situation, but about the decision to fix my rate or let it switch over to variable:

1. Start paying more into your home loan today

This is what Melissa said: “Some people who are on fixed rates don't really understand how high their rates are going to jump. They've seen the rate rises, but they don't really think about how it's going to affect them.

"We are speaking to clients six months out from the end of their fixed rate to help them put strategies into place. We're getting them to pay an extra $50 a week on their mortgage for the first month, an extra $100 in the second month and so on.

"This is changing their mindset while also building a buffer into their loan.”

2. Ride the variable wave

“While fixing your rate might feel like the safest option, it’s not going to save you money right now. We are suggesting that our clients to ride the variable wave. "An average fixed rate for two to three years right now is over 6%. But we can get clients on a variable of 4.79% to 5%, so there's room in there for further rate rises.”

3. Don’t fret about the future

“I don't think there's going to be another whole percent rate rise in the next six months. All the major economists are actually predicting that we will pivot even lower towards the end of next year.”

4. But don’t fall back into old habits

“This is the new norm. Rates won’t be dropping back to historic lows. Borrowers need to get used to these types of interest rates for the foreseeable future.”

Why it pays to ask the question

I knew the interest rate’s massive surge would hit my hip pocket pretty hard – not ideal when my wife has just given birth to our second child.

But what I wasn’t prepared for was that my lender would be hitting me with their highest rate possible.

📱So I jumped on the phone and asked Melissa what she could do:

We’d started off with a two-year fixed rate of 2.70%
.
When my fixed rate lapses in mid-December, my lender said my new rate would be an
eye-watering 6.12%!
After speaking to my broker, she promised she’d be able to get me a much better deal
without even having to switch lenders.
Result! Melissa managed to get my variable rate down to 4.69% – saving me just under
$20,000 a year than if I hadn’t asked the question.

The bottom line

While everyone’s situation is different, Melissa says now is not the time to fix your rate.

Instead, she recommends riding the variable wave and making smarter decisions around spending, saving and paying down your mortgage as fast as possible!

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