I've had an offer from a mortgage broker who reckons he can get me a better rate if I switch to fixed for 2 years. As I rarely get to see or read the news I'm pretty clueless in this area so what's the general consensus? To fix or not to fix?

Mortgage brokers work on commission...

Don't fix unless you're on a very very tight budget such that a 2 percentage point increase in interest rates would cause you to lose your house. Pretty unlikely a two-year fixed will save you any money given the likely setup and transfer fees.

As Chris says above. Mortgage brokers work on commission so they're interest in churn - they make no money from people just sticking with what they've already got. A decent broker should, though, be able to tell you if there are any deals better than your current and possibly get you a better discount off teh published rates.

If you can sleep at night with variable rates then stay variable.

A "fixed rate" mortgage always priced at a lower interest rate anyway. It does have its advantages as well as disadvantages.

Advantages:
* Lower rate
* You have the certainty of the interest rate

Disadvantages:
* You can't pay off more of your mortgage if you do have some extra cash floating around, or even better, win Lotto. You have to pay a penalty if you want to pay more

Variable Rates has the following advantages and disadvantages.

Advantages:
* You benefit from a lower rate when and if available
* You can pay off more without having to pay a penalty
* Because you can pay more than the set amount, your net interest amount will be less. You can pay off your loan sooner.

Disadvantages:
* A higher rate than fixed rate

A compromise

How about setting half your loan a fix rate loan, and the rest on variable interest? You can establish the proportion in whatever mix you are comfortable with.

One word of warning, please. Don't fall for the "Interest Only" loan because you will find yourself in deep water later when interest rate shoot up, and you still haven't pay anything towards your principle !

Show me a bank that has a fixed rate loan of any term set at a lower rate that its best variable rate loan?....I've never seen it. A fixed rate loan is effectively a hedge by the bank on the future of interest position is it not? As such it has risk priced into it. There is absolutely no reason whatsoever for the bank to set the fixed rate below a variable rate as if they have hedged wrong and interest rates go up, they get burned harder than if they had convinced you to go for a variable loan via a lower rate.

Over the usual long term of a mortgage, variable has generally proven to be the cheapest. As said above fix only if you want certainty with payments, but you will pay a premium for the pricing in of the risk.

IMO

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CJW said..
Show me a bank that has a fixed rate loan of any term set at a lower rate that its best variable rate loan?....I've never seen it. A fixed rate loan is effectively a hedge by the bank on the future of interest position is it not? As such it has risk priced into it. There is absolutely no reason whatsoever for the bank to set the fixed rate below a variable rate as if they have hedged wrong and interest rates go up, they get burned harder than if they had convinced you to go for a variable loan via a lower rate.

Over the usual long term of a mortgage, variable has generally proven to be the cheapest. As said above fix only if you want certainty with payments, but you will pay a premium for the pricing in of the risk.

IMO

It does happen. I fixed my mortgage twice and got lucky that rates went up each time. They thought rates were going to go down, and instead they went up.

The banks are not infallible and while they do try and hedge their bets, sometimes they get it wrong. Ultimately they will turn it in their favor, and someone else will pay.

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mitchbat said..
I've had an offer from a mortgage broker who reckons he can get me a better rate if I switch to fixed for 2 years. As I rarely get to see or read the news I'm pretty clueless in this area so what's the general consensus? To fix or not to fix?

All good comments by others but specifically for this question, market has priced in 1 interest rate cut for late this year. That is expected.

Interest rates are defo not going up in 2 years.

But they might go down, and even down again.

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FormulaNova said..

It does happen. I fixed my mortgage twice and got lucky that rates went up each time. They thought rates were going to go down, and instead they went up.

The banks are not infallible and while they do try and hedge their bets, sometimes they get it wrong. Ultimately they will turn it in their favor, and someone else will pay.

Yeah absolutely it happens but at the particular point in time you fixed your rate I'm sure the bank was offering a lower variable rate? Hence the claim 'lower actual rate' as in the fourth post relies on a particular set of circumstances which is fairly rare and certainly not the case at the start of a loan, from what I've seen anyway.

Don't forget you can usually split your mortgage between fixed and variable, have a bit of both!

The original question is a tough one to answer as it depends on so many things like your job security, income, prospect of pay rises, size of the mortgage, repayments, your aversion or attraction to risk, whether you're already in mortgage stress and likelihood of wanting to sell/buy property, cars or investments. The list of factors is endless.

I remember borrowing a **** load of money about 17 years ago and was worried that rates might return the bad old days of 18% .

The rate at the time was around 8.5% and I could handle it going up to 10% before repayments were going to be a problem, so I took out insurance in the event the rate went above 10%. It was about $1100 a year for the insurance and the higher you set the kick in rate the cheaper it got, anyways it helped me sleep at night.

BTW, in the States, 30 year fixed is the norm, with no pre payment penalty. Rates have been good, 3-5% for years.

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TheRodder said..
BTW, in the States, 30 year fixed is the norm, with no pre payment penalty. Rates have been good, 3-5% for years.

Are you American? Otherwise "in the states" sounds wrong.

Apart from that, those offers have never been available here....

Hmm, coming to a sporting site like this asking for mortgage advice, is not that much different than asking for which stocks to buy.
Not that there isn't any knowledge here, there is, but I'd probably go to a financial forum of some kind, if not a financial adviser, person to person.

Consider the worst case scenario and how you would be able to respond. Let's say in two years rates are up significantly, will your job likely be secure enough that you will be able to refinance?
If housing values take a downturn of for instance 10% is there enough equity in your home to overcome this if you need to refinance? What I mean is if for instance your home is currently valued at $500K but in two years is worth $450K but you still owe $500K the bank will not give you a new loan for $500K.
How much will it cost to refinance in two years vs how much you can save with a variable rate over those two years vs the alternate fixed rate?

Thanks for all the advice fellas. I wasn't aware that you can't make extra payments with a fixed loan so it sounds like I should stick with what I have. For the record Mastbender there are a heap of users on this forum with their own mortgages and opinions so I reckon it's a good a place as any to get a second opinion. Given that it's almost a unanimous vote for variable rate I think I've found the answer that I need. Cheers. Mitch

Most of new loans from banks are interest only these days.

Them means that people now:

-max their loan ability

-never are going to repay loans

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Macroscien said..
Most of new loans from banks are interest only these days.

Them means that people now:

-max their loan ability

-never are going to repay loans

^ Thats you negative gearing foke.

Anyway, lets not derail this thread.

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Jupiter said..
A "fixed rate" mortgage always priced at a lower interest rate anyway. It does have its advantages as well as disadvantages.

Sorry, this is wrong (as well as a few other comments following), but your views are understandable if you have only been borrowing since the GFC and ever decreasing interest rates. Simply put fixed rates have no correlation with spot variable rates whatsoever and can be above or below them at any time....

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CJW said..

FormulaNova said..

It does happen. I fixed my mortgage twice and got lucky that rates went up each time. They thought rates were going to go down, and instead they went up.

The banks are not infallible and while they do try and hedge their bets, sometimes they get it wrong. Ultimately they will turn it in their favor, and someone else will pay.

Yeah absolutely it happens but at the particular point in time you fixed your rate I'm sure the bank was offering a lower variable rate? Hence the claim 'lower actual rate' as in the fourth post relies on a particular set of circumstances which is fairly rare and certainly not the case at the start of a loan, from what I've seen anyway.

It's been a while, so I can't remember exactly what the details are, but I think (at best) that it was that the fixed rates were lower than the variable at the time, but the banks were expecting the variable to fall further, but instead they went up.

I only recall this because I was surprised that I got it right. I even got the timing right in that I fixed one loan for 2 years, and when that expired, interest rates were on the way down again. 2 years is a pretty far out time to forecast, let alone 5 years.

I can see the case where the banks might offer a fixed rate higher than the variable rate as well, but that would only be where the general public think that rates are going to go up so much that they would take the risk in the short term. If you don't get the mix right, customer's just won't buy the product. If your fixed rates have the risk factor built in, and always come out behind variable rates, customers would never use them.

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Paradox said..

Jupiter said..
A "fixed rate" mortgage always priced at a lower interest rate anyway. It does have its advantages as well as disadvantages.

Sorry, this is wrong (as well as a few other comments following), but your views are understandable if you have only been borrowing since the GFC and ever decreasing interest rates. Simply put fixed rates have no correlation with spot variable rates whatsoever and can be above or below them at any time....

Perhaps you can point out where I was wrong, and put up your views for the benefit of Seabreeze and myself ?

My understanding is that if banks expect the rate going up in next few years (the length of the fixation) then fixed rates are higher than current variable rate. If banks expect the rate going down then fixed rates are lower than current variable rate.

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Dusan Tkac said..
My understanding is that if banks expect the rate going up in next few years (the length of the fixation) then fixed rates are higher than current variable rate. If banks expect the rate going down then fixed rates are lower than current variable rate.

That is a pretty neat summation. I would add that if the fixed and variable rates are about the same, then they must have NFI!

BTW, just because the market "expects" rates to move in a particular direction, that doesn't mean they will. Economists are frequently wrong.

Further to the comment on US rates being fixed for long periods without prepayment penalty, this raises a number of problems including raising the risk for the lenders, which means this risk must be priced in, and so therefore rates are generally higher than they otherwise would be. Those who don't repay early are effectively subsidising those who do.