Mortgages aren’t designed to be one size-fits-all, while fixing your interest rate offers an effective means to combat any further rate hikes, there could be other options that better suit your needs. Here’s ipac’s view on fixed versus variable interest rates.

Fixed vs. variable – what’s the difference?
A fixed rate simply refers to a loan with a pre-determined interest rate that’s set for a given period, usually between one and five years, but it can be up to 15 years. This differs from a variable rate, which changes according to the official short-term interest rates (that are set by the Reserve Bank of Australia).
Whether a fixed or variable interest rate loan is right for you will depend on your personal circumstances and needs. For example, do you want to pay off your mortgage as quickly as possible, or are you looking for consistency in repayments to help you budget more effectively?

Variable rates
The key advantage in variable interest rates are they are usually lower than fixed rates. There is also additional flexibility should your circumstances change, ie it is easier to increase or decrease monthly repayments and typically feature a low or no penalty for early discharge of the loan. Variable interest rate loans generally offer more features that may be appealing such as redraw and 100 per cent offset.
However, if interest rates do go up, so will your repayments as the variable interest rate increases. Will you still be able to cover your repayments? It’s worth doing the numbers before signing up for a mortgage.

Fixed rates
The advantage of a fixed rate loan is that it offers certainty for borrowers who would have trouble managing a higher rate. It is ideal for those working to a tight budget, as repayments won’t change should rates rise.
However, fixed rate loans are generally less flexible, possible heavy penalties if you pay out early or refinance the mortgage. Switching to a fixed-rate loan may have also have associated fees and charges – so do the numbers first before making any decisions. In some cases, the rate offered at the time of application may not be the rate you finally get unless you elect to ‘rate lock’ (sometimes at an extra cost) at application time.

Best of both worlds?
While both fixed and variable-rate mortgages have their benefits, there is a hybrid loan that lets you have the best of both worlds: the split-rate loan. This divides your loan into a fixed and variable rate component, allowing you to take advantage of the lower variable rate and flexibility for part of your loan, while maintaining the security of a fixed-rate for the other component. You can usually choose the proportion of your loan on fixed and variable to suit your circumstances. You may even select more than one fixed rate term, so that the fixed rate loans mature at progressive intervals.

Looking ahead
While you can’t personally change interest rates, you do have control over the amount you save and the amount you spend each week. Even finding an extra $5 per week to put towards your mortgage can make a real difference over time.
If you need help putting in place a plan to grow your wealth, please call ipac on 1800 626 881 to arrange a no-obligation appointment with a professional financial adviser.