Fixed or floating mortgage : Your options explained

Interest rates can be confusing – but worth figuring out. Securing the right one can help you save thousands of dollars long-term, so it’s important to understand your options and know which will best suit you. But how do you decide on fixed, floating or a mix of both? There are pros and cons to all options, and deciding which is best for you comes down to your personal circumstances. We’re always here to help you work out the ideal scenario.

Fixed interest rates – the pros and cons

A fixed mortgage has an interest rate fixed for a term, regardless of what’s happening in the market. That means if interest rates skyrocket – or fall – you’ll still be paying the same rate. A fixed-term mortgage is a set-in-stone agreement – if you want to reduce your repayments or pay off more of your loan, you’ll have to break the fixed term and will likely be facing hefty penalties. Fixed terms are usually between six months and five years.

Advantages

• • Banks want your business. Different lenders may offer competitive fees – and you may be able to negotiate an even lower rate.
• • There are no surprises with a fixed rate – you know exactly how much you need to pay off each month, and can budget accordingly.
• • Interest rates are at an all-time low – securing them now could save you thousands.
• • At the end of the term, you have the option to refix or swap to a floating rate.

Disadvantages

• • If you want to make a lump-sum payment, you may be penalised with an additional fee.
• • There’s a chance floating rates may drop below your fixed rate – if you’ve chosen to fix for a long term, you won’t be able to take advantage of the lower rates.
• • If you break your loan term or decide to sell your property, you will likely be charged a fee.

Floating interest rates – the pros and cons

A floating mortgage generally reflects the state of the economy at any one time – rates fluctuate depending on the Official Cash Rate (OCR) set by the Reserve Bank. Floating rates are usually higher than fixed rates, but with no set term or fixed agreement, so you can pay lump sums off your mortgage without penalty.

Advantages

• • You’re not locked-in to monthly repayments with a floating rate. This will benefit you if you have an inconsistent income or are paid sporadically.
• • Floating rates go up and down depending on the financial climate. There’s less certainty with a floating rate, but you may secure a lower interest rate than some people on higher fixed rates.
• • If interest rates go down, you may be able to pay your loan off faster by keeping your repayments at the same amount.

Disadvantages

• • You may get lucky and secure a low rate, but generally floating rates are much higher than fixed, so you’ll likely pay more interest overall.
• • It’s difficult to plan with a floating rate – rates can go up suddenly and significantly, and may put a strain on your budget.

A mix of fixed and floating – the pros and cons

You don’t need to put your entire borrowing into one kind of home loan – you also have an option of splitting it into fixed and floating loans. This way, you could strike a balance between the certainty of the fixed rate and the flexibility of the floating rate, to secure better financial outcomes.

Advantages

• • Some of your loan is on a floating rate so you can pay off more – or less – when you need to, without penalty.
• • The bulk of your loan is fixed, which generally means you’ll secure a lower rate.

Disadvantages

• • Managing a mix of home loans can be more complex, but a good adviser can help make things simple.

Revolving credit and offset loans

Once you’ve decided on fixed and/or floating, you might like to take advantage of a revolving credit facility or an offset account. Either of these can help you pay off your loan faster – if you’re disciplined.

Revolving credit

Revolving credit is like having a giant overdraft on your account. You only pay interest when you dip into it, but interest is calculated daily – so keeping your revolving credit balance low can save you thousands in interest.

If you’re confident in your ability to budget sensibly and won’t be tempted to dip into your credit unnecessarily, a revolving credit facility could help you pay off your loan much faster. Adding more money to your revolving credit account doesn’t just offset the interest you pay, it also reduces the loan balance overall, so you’ll pay down your mortgage much faster.

Offset mortgage

An offset mortgage uses money in your everyday account to ‘offset’ interest on your home loan. This reduces the amount of interest you pay and helps repay your home loan faster. You’ll still have the same monthly repayments, but more money will go to your principal loan rather than to interest. It differs from revolving credit, however, in that the money in your offset account will only save you interest – you won’t be able to affect the actual balance of your fixed home loan.

To fix or to float – that is the question

Whether you choose a fixed rate, floating rate or a combination of the two, there’s a lot to wrap your head around. Start by talking to an expert – we’ll help you understand your options and ensure your mortgage is performing at its best.
Contact us to talk about your mortgage today.

**These are general guidelines and are by no means a reflection of bank or lending policies