Are Fixed Rate Home Loans a Good Idea?

The question of whether to get a fixed rate or a variable rate loan is always a vexing question. Should I fix or not? Should I get a fixed rate for three years or five years? Maybe 10 years? These are questions that are always asked when buying property whether you're an owner-occupier or an investor. More recently, 30-year mortgages have come on to the market. The reasons for this are clear; a 30 year mortgage affords the buyer lower monthly repayment terms. Moreover, fixed rate home loans offer the borrower certainty as to the size of repayments.

The most commonly used fixed rate loans are three year and five year. This has been the case for many years. These terms are generally used because interest rate movements can be predicted with more certainty over a short term than a longer term. They are in fact sometimes cheaper then standard variable loans. You will therefore find longer term fixed rate loans are relatively more expensive than their shorter term counterpart. The point to consider is that interest rates are more predictable in the short term than in the longer term.

Longer term loans will be priced according to both the popularity of the product and market predictions for long term interest rates. They may be higher, for example, than five year loans. Thirty year fixed rate loans will become increasingly popular for the same reasons than five year mortgages have become increasingly popular: they offer a lower monthly repayment loan for cash-strapped borrowers. In addition, investors who may be happy to literally, put the keys away in the bottom draw and own investment property for the very long term, will find the 30 year fixed rate loan attractive.

Thirty year fixed rate loans offer a fixed repayment rate for the term of the loan. It is likely that investors with very long term horizons will find them attractive even though they may have a higher interest rate applying. Investors usually have investment horizons well beyond five years - often 25 to 30 years - as a means of growing their capital. This may also be the case for owner occupiers who don't want to sell.

The appeal to investors is compelling, for over time the value of the property can be expected to appreciate at least at the rate of inflation and more while the amount of the loan is fixed. That way at the end of the thirty year term the potential capital appreciation is significant. For the owner occupier the advantages are compelling too. The main disadvantage being that should rates decline for a significant amount of time and stay there then there is an effective opportunity cost in sitting on a thirty year fixed rate loan.

As with all mortgages, the terms and conditional should be such that a borrower can, in some circumstances make decisions to switch to a different loan, perhaps with a shorter term; or in the event of needing to sell the property, clear the mortgage without any significant costs.

We are a firm of Brisbane Mortgage Brokers here to help you with your home loan needs. Contact today.

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