Lender advises against fixing loan rate

By Terry Ryder, 4th November 2009

Property buyers should avoid the impulse to fix their home loan rate in the wake the Reserve Bank’s consecutive interest rate rises.

Kevin Sherman, managing director of direct lender MyRate.com.au says people could be forgiven for thinking the safest option is to fix their interest rate. “But don’t rush into it,” he says. “Variable loans are usually the best option in the long-term for most borrowers.

“The key advantage of a variable loan is flexibility – the ability to make and redraw additional repayments without fees, penalties or break costs. As a result, variable loans can seriously cut your interest costs.  

“When interest rates begin trending up, we often see panic and people rushing to fix their loans. However this is often not the best option or the best timing and people should rather use this time to shop around and make sure they secure the best loan for their needs”.  

Sherman says opting for a fixed rate when rates start to rise often means borrowers lock in rates considerably higher than variable rates at the time – this means rates would need to rise fairly quickly before most borrowers will get any benefit. 

He says there are some benefits to fixing – including security in knowing your monthly amounts are set and protection against future variable rate rises. “But for most Australians we believe these benefits are outweighed by the many restrictions of a fixed loan,” he says. 

Sherman lists the four key restrictions of a fixed loan as:

• Restrictions may apply on any extra repayments you make into the loan, “which means you can’t use windfalls or bonuses to boost your repayments.”
• Any extra repayments you do make, may not be able to be redrawn.
• There may be penalties which apply if you break your fixed rate term.
• If variable rates decrease lower than your fixed rate, you will be paying more than you otherwise might have been.