Fixed vs Variable - What's Actually Going on Right Now
With everything happening in the economy at the moment, it's no surprise that fixed rates are coming up in a lot of conversations. If you've been seeing headlines and wondering what it all means for you, this is your honest breakdown.
The truth is there's no single right answer. Whichever way you go, there's a trade off. Variable gives you flexibility, but your repayments move with the RBA. Fixed gives you certainty, but you give up flexibility. The right choice really comes down to your situation and what matters most to you right now.
Option 1: Staying variable
This is the most common path for first home buyers. Here's what you keep:
Full flexibility with unlimited extra repayments
Access to your offset and redraw accounts
No break costs if you want to refinance or sell down the track
The ability to benefit straight away if rates do come down
The trade off is that if rates keep rising, your repayments go up with them.
If you're staying variable, here are a few things worth doing now:
Know your numbers. Make sure you've got a clear picture of what's coming in and going out each month. If you don't already have a spending plan in place, now's a good time to build one.
Work out where you have flexibility. If rates do keep rising, which expenses could you pull back on if you needed to?
Build your buffer. We always recommend having an emergency fund sitting in your offset account so you've got capacity if things shift.
Option 2: Exploring a fixed or split loan
Fixing isn't about saving money. You fix because you want certainty in your cash flow and peace of mind that your repayments aren't going to keep moving on you.
Rather than fixing your whole loan, what we'd typically look at is a split loan, where you fix a portion and keep the rest variable. This way your offset and redraw keep working on the variable portion, and you get the certainty on the fixed portion. If you are going to fix, it's generally worth making it meaningful, at least 50% or more, otherwise the benefit isn't that great and you're still locked to a lender without much benefit.
You can also choose how long you fix for, anywhere from one year up to five years depending on the lender. The right term really comes down to what the next few years look like for you.
The main things to understand before fixing:
Fixed rates currently come at a premium. Right now most lenders are offering fixed rates higher than their variable rates, which means you're paying extra upfront for the certainty. Whether that ends up being worth it really depends on what happens to rates during your fixed period, and that's something nobody can predict with certainty.
No offset or redraw on the fixed portion. Whatever's sitting in your offset right now will stop working against that part of the loan if you fix it. This is one of the main reasons we lean toward a split rather than fixing everything.
Break costs can be significant. If your circumstances change during the fixed period, and you decide to sell or refinance, the bank can charge you a break cost based on their economic loss. These can be substantial and aren't easy to calculate upfront. So you'd need to be confident you won't need to sell, refinance, or take equity out over the fixed period.
Don't fix through your banking app without talking to a broker first. Banks make it very easy to click a button and lock yourself into a contract without fully understanding what you're committing to. There may also be more competitive fixed rates at a different lender, so it's worth checking across the market before locking anything in.
Is fixing worth exploring for you?
If the following apply to your situation, fixing might be worth considering, but it still needs to be carefully thought through:
My budget's feeling tight, and there isn't much I could cut if rates keep rising
I'd prefer the certainty of knowing what my repayments will be for a set period, and I'm comfortable if that means I end up paying more during that time
I'm confident I won't need to sell, refinance, or take equity out during the fixed period
Want to talk through your situation?
Everyone's numbers are different and there's no substitute for looking at your specific loan, income, and plans before making a decision like this. If you'd like to chat it through, you can book a chat with me here.
Want to learn more?
New to some of these concepts or want to go deeper? These episodes are a great place to start:
