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With interest rates at 53 year lows, there has been a surge in borrowers looking to fix the interest rate on their loans.

With interest rates at 53 year lows, there has been a surge in borrowers looking to fix the interest rate on their loans.

Fixed interest rates are currently very attractive – with many lenders offering fixed rates lower than the discounted variable rates.

The Bureau of Statistics reported that 20.6% of new loans in April were fixed. This is the highest since March 2008.Although this is high, fixed rates still remain relatively unpopular option because Australians want a home – they don’t want the mortgage that comes with it. Paying off the mortgage as quickly as possible is a major focus – and it is variable home loan products that best offers the flexible features to achieve this outcome.

Fixed interest rates are offered by lenders on the basis that the lender can expect a guaranteed rate of return on their money. So if you change your mind and look to break your fixed rate loan term then you can suffer the costly consequences of paying fixed rate break costs in the event the market has moved against you. Generally speaking, if variable interest rates continue to drop below your fixed rate, then getting out will prove expensive, especially if there is a lengthy duration remaining on the loan term.

Knowing what you are going to be doing in 3 to 5years’ time can be a challenge. Needing to sell your property due a change in job location or circumstance can be a major reason fixed break costs are incurred.Since things can change, keeping your interest rate variable or fixing for time periods of less than 3 years might be a good idea.

As of 25 September 2012 the Reserve Bank reported that around half of all Australian borrowers were ahead on their mortgage payments and estimated that mortgage prepayment buffers in Australia were equivalent to around one-and-a-half years of scheduled repayments based on current interest rates. Our increased conservatism for debt post GFC means that Australians tend to pay off owner occupied debt as quickly as possible. Fixed rate products offer certainty around repayment amounts, but they typically only offer a negligible opportunity to pay extra off the loan.

The upside of fixing your interest rate is that if things are tight and you plan to stick to a rigid budget, you have the security of knowing exactly what your repayments will be for the foreseeable future. Those with families in particular can need certainty of fixed loan payments rather than being at the mercy of fluctuating interest rates. Sooner or later the fixed term will expire so remember to factor in higher loan repayments if interest rates have risen since you fixed.

So, if you are wanting some security around your repayment amount, yet are still wanting some flexibility to pay extra off your home loan, then splitting your loan 50% variable and 50% fixed is not a bad consideration, especially in this market when fixed rates are below the discounted variable rates. You will generally be locked into a set repayment schedule for the fixed portion but you will have full flexibility with the variable portion and be able to pay it off quickly. It is like having the best of both worlds.