Fixed Rate vs Variable Rate in 2024: Which is better?

Fixed vs variable rate mortgage in 2024, is now a good time? With the cash rate at a record low, and interest rates paralleled, the question “is now a good time to fix my mortgage” has never been more prevalent. More and more I’m asked, but, what factors should you consider, and how do you know now is the right time to fix in your mortgage?

00:00 Fixed vs Variable Mortgage in 2024: Which is better?
02:00 1. A Fee For How Much The Bank Loses If You Leave Early
02:57 2. How Do I Determine The Correct Split?

Well, firstly, lets look at the difference between your two options, fixed or variable, from there, we’ll delve into the mechanics that’ll drive your decision.

A variable is an interest rate that increases and decreases with the market and over time generally allying itself with the cash rate. Your repayment too sway with this movement, essentially the higher your rate, the higher your repayment, with the converse also being true. .

With a Fixed rate you can typically choose from a 1 - 5 year, it’s in this period your interest rate doesn’t change, as the name implies it’s fixed. Ordinarly, a standard home loan term is 30 years, so if you chose a 5 years fixed rate, once this ends you’d revert to a variable home loan rate, with 25 years still remaining. It’s at this time you can elect to go for another fixed rate or stay on a variable.

Too many jump into a fixed rate when the banks offer is enticingly low rates, but don’t fix based on this. When you’re at the casino the odds are stacked against you and like a casino, the goal for the bank is to make money.

So why should you fix?

The first question should be, are you after stability, that is, do you want to know both now and in the future what your repayments will be? This is vitally important if you’re a budgeter, need continuity, don’t want your lifestyle to change from increasing repayments or expecting a life event such as having a baby.

By choosing a fixed rate based this you’ll give yourself the greatest chance of success, because if rates go up or down, you’ll have made your decision in knowing and gaining certainty on repayment,

flipping this based on rates, you’ll always be frustrated as if rates were to decrease, your inclination will be to break and chase lower offered, which only leads to fees and charges including what’s known as a break fee.

Whilst a fixed rate has a number of fantastic perks, one of the detriments is this the break fee, essentially a fee based on how much the bank loses by releasing you. How it’s calculated is the difference between the banks cost of funding at the time you fixed your rate and when you break it. So let’s say you elected for a 2 year fixed on your $500,000 mortgage, at the time the bank cost of funding was 3.55% (note this isn’t the rate you’re offered, it’s simply the cost for the banks to secure these funds, also known as the wholesale rate) 18 months later you break this fixed rate, where now the banks cost reduced to 2.65%. This means the break fee for leaving 6 months early would roughly be $2,250 (thats 0.90% x $500,000 which is the annual break fee, divided by two, as only 6 months remaining).

For many, choosing a portion fixed and variable offers the best of bot worlds but the problem for most is how to determine the correct split? Allot of industry professionals say to simply split your fixed and variable mortgage 50/50, essentially hedging your bets. But if you’ve chosen the fixed rate for the right reasons, this isn’t the correct split for you.

Most lenders allow you the ability to have a portion fixed and variable, but do limit it to their product criteria, this means that a lot of banks won't allow you to split their flagship no fee low rate products. But details aside, to determine the right balance you first need to start with your budget ability, in this case we meet mrs and mr Smith, who can afford $3,500 comfortably, they’ve got a mortgage of $500,000. The fixed rate they’ve gone for is a 3 year fixed at 5% over a 30 year loan term. So firstly, we’ll first look at what their current minimum P&I repayment which comes to $2,684.11. From here we simply minus what they can afford $3,500 which leave us $815.90 per month or $29,372.04 over three years. Therefore, the minimum this couple should have fixed would be $470,000 and the remaining $30,000 variable.

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[leighdonald]

Say i choose a fixed rate loan, after the fixed rate period is over and the loan reverts to a variable rate am i able to have re-draw and offset facilities on the variable portion? Or would i have to re-finance to a new loan with those options?