These 3 questions will help you choose the right type of mortgage

With the Reserve Bank of Australia slashing interest rates, but lenders failing to pass on the full cut, the age-old question remains: should I fix my home loan rate, or take the risk with a variable rate?

There are pros and cons with both options, but if you’re leaning towards fixing your mortgage, money expert Nicole Pedersen-McKinnon has a few “big buts” for you to mull over.

But 1: Never fix more than half your mortgage

“Fixed rates are decided by a team of banking boffins, experts in predicting interest rate movements…to ultimately make more money from you over the lifetime of your mortgage,” she said.

“Lenders are not in the business of giving it away, and rates are set as such.”

But 2: Never fix your mortgage for more than three years

In three years, Pedersen-McKinnon said interest rate expectations could entirely reverse – as they did during the 2008 global financial crisis.

“There was nothing they could do though – you bet against a bank and sign that contract,” she said. “If you later want to get out of it, you’ll pay break costs equivalent to the lenders’ loss.”

But 3: Only (half) go for it if you can save money instantly

Homeowners should only choose to fix their rates if they can get a fixed rate below what they’d pay on a variable.

“This is particularly so if official rates are next expected to fall. You’ll get ahead today, so it matters less what happens later,” she said.

What else do I need to know?

When homeowners fix their loans, they probably won’t be able to pay any extra off of it, Pedersen-McKinnon said.

“That means you can’t access the enormous interest savings this secures. What’s more, if the loan has one, any attached offset account is likely to save you only half as much. What’s counted or what’s credited is usually reduced.

“Consider a fix carefully.”

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