Variable Interest, Fixed Interest or both. Whats the best in the current climate???

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Permalink Reply by jacquesk on August 4, 2009 at 1:02pm

I think I would be inclined to go for it and fix the majority of your loan. I do not think interest rates will go lower. I would consider fixing 60 - 75% of the loan. The prob with fixing your loan is that you cannot pay it off any quicker therefore I would not fix 100%. I am a firm believer in leaving some wiggle room just in case some extra money does appear or in a worse case scenario you can always alter the variable bit to interest only.

This is based on you having continuing employment or some other constant income stream that will allow you to safely service your loan and bear in mind I am just a punter like yourself and not a finance professional.

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Permalink Reply by Bandwidth on August 4, 2009 at 6:23pm

Hello Sharmo

My thoughts are mostly based on pobability.

The probability that rates go down is low and the probability they will go down lots is lower.

The probability they will go up, in the near future is medium to high and the probability for a large rise is at least medium.

Also the banks are moving the fixed rates to around the long term average. They will do this ahead of expected rises. People say they will move to fixed when the variable moves up, by then the banks will have covered themselves by moving up the fixed rates.

I have locked in the majority of my borrowing for 3 years at what I consider a good rate

Ultimately the choice comes down to what makes you comfortable

As with Jacquest I am a general punter and my comments should not be seen as financial advice.

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Permalink Reply by JeffK on August 6, 2009 at 4:02pm

I'm with Bandwidth on this one - I reckon the probability of rates going down is next to nothing, however there is a chance that they could spike up.

Although Jacquesk is right about you being able to pay off the variable portion without being penalised, note that if rates go up, you'll be able to pay out your fixed loan without penalty.The bank WANTS you to break out of a low interest rate loan. You used to actually get a payment from the bank if variable rates were significantly higher than the fixed rate you were breaking out of, but I think they did away with that.

JFK

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Permalink Reply by jacquesk on August 6, 2009 at 4:46pm

Exactly! That is why you would fix a sizable portion of your loan. Lets say you locked in 75% of your loan into a fixed rate. If interest rates go up then the portion locked in at the lower rate (75%) is unaffected. The portion that remained on the variable rate (25%) is affected but you are only paying the higher interest rate on that portion.

With the variable portion of the loan you can pay it off quicker (if you have extra funds). This to me is the argument and main advantage for keeping part of your loan as variable.

As I said in the earlier post another advantage of the variable portion (or a variable loan for that matter) is that if things go bad like losing a job etc then you (if your lender agrees) can convert to paying interest only.

A friend of mine who became unemployed recently did this until she found another job.

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Permalink Reply by jacquesk on August 11, 2009 at 1:08pm

Just thought this might be of interest.
http://business.theage.com.au/business/fixedrate-mortgages-back-in-...

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