To fix or not to fix, that’s the question

Currently three and five year fixed rate mortgages are offering rates of 6.5 per cent to 7.3 per cent, compared with the average standard variable mortgage rate of about 5.8 per cent.

Many economists and observers expect official interest rates to stay low for at least two years, making fixed rate mortgages difficult to justify, given the large current price differential.

Borrowers often opt for fixed rate mortgages at exactly the wrong time. Many borrowers choose fixed rate products when rates are high and rising because they fear repayments rising even further.

A record number of mortgagees took out fixed rate loans when interest rates were high last year and are now paying up to $1,000 per month more than they would be if they had opted for a variable rate mortgage.

Experts say that the term of a fixed rate mortgage is very important. A three to five year loan is a long enough time period to be effective in creating certainty for the borrower. A ten year fixed rate loan is often thought to be too long.

Source: Sunday Herald Sun