Fixed or Variable Mortgage: How Setting Your Rate Can Save $160,000

Interest rate hikes cause mortgage stress, but a financial advisor has one tip for anyone who wants to save a lot of money.

After the Reserve Bank of Australia (RBA)’s first rate hike in more than a decade, rising mortgage costs are worrying many Australian property owners. And for good reason.

After record levels of Australian lending, record low interest rates and a staggering rise in property prices in recent years due to the Covid pandemic, many mortgage holders are feeling more exposed than ever before.

ABS data shows that the average mortgage size in NSW is $805,675. With a mortgage of this size over a 30-year term, a 1 percent increase in your mortgage interest rate increases your repayments by $449 per month, equating to an additional $161,746 in total interest over the term of your loan.

You can see from these numbers that it can seriously pay off to get your rate choices right.

But given the recent interest rate hikes and with more at stake, is now the right time to take out a fixed rate mortgage? And how do you best prepare for the interest rate hikes that will eventually come?

Beating the banks is hard

In Australia, the banks have huge teams of analysts, economists and market experts who are constantly focused on how the bank should price their fixed-rate mortgages to ensure they remain profitable for the company.

As for the basics of how these mortgages work, it’s worth noting that the banks generally look to price them so that they earn the same amount whether a customer uses a fixed or variable rate mortgage. That doesn’t always work, but history shows us that the banks are more often right than wrong.

The implication is that it’s really hard to “beat” the banks when it comes to settling your mortgage. But solving your mortgage isn’t just about beating the bank. There are a number of important benefits that come when you set up your mortgage.

With a fixed mortgage you have certainty about what your mortgage costs will be for a certain period. This gives you the opportunity to make a clear, informed decision about your mortgage and the other things you do with your money outside of your mortgage.

This can give you peace of mind and go a long way in reducing stress around your ability to comfortably fund your mortgage payments and do the other things you want to do with your money.

Having a fixed rate mortgage should also give you a lot of confidence to execute other investment strategies outside of your property, such as buying stocks, investing through super or building your emergency fund or cash.

Rate increases are priced in

As it stands, the banks have seen the writing on the wall around rising interest rates and have priced some of these increases into their fixed-rate mortgages.

According to recent data from Finder, the current average fixed rate is 4.06 percent versus 3.33 percent for the average variable mortgage rate. This means that if you are considering fixing your mortgage, you should be prepared to pay a higher interest rate in the short term.

So how do you find out if arranging your mortgage is the right move for you?

Step 1: Understand the costs of fixing your mortgage

The first step to take this path is to look at what it would cost if you settled your mortgage tomorrow. You can use an online comparison site or chat with your mortgage broker or bank to confirm what your new monthly mortgage payments would be.

Step 2: Rate how this fits your budget

This next step is obvious, but there are some mistakes people make here that can lead to problems. Take the time to unpack your budget and savings plan, what money is coming in, what is going out, and what is left.

By doing this, you want to make sure that the spending side of things is solid. It is common for people to forget about expenses that are important to them, which can give you the wrong feeling that you have more money to spare than you actually do.

Take the time to think about the less frequent expenses you spend on, car and home maintenance, medical expenses, travel expenses, and anything else that matters to you so that you can make sure the money is there for those expenses when you do. that want .

Then it’s time to see how much you have left to save and invest. This money will boost your wealth-building progress for years to come, so you’ll want to have enough to achieve whatever goals or goals you have in mind.

Once you are sure of your numbers, you can look at the impact of changing mortgage costs. Look at your mortgage payments if you were to repair and how it fits.

In addition to looking at the impact of a fixed rate, you should also stress test your variable rate and see how your monthly mortgage payments would change if your interest rate rose by 1 to 2 percent.

Based on the results you get from going through this process, you should proceed with caution if repairing your mortgage appears to cause financial strain. But if you look at your rising variable rate scenario and this is putting pressure on you, it may be a more comfortable step forward to fix all or part of your mortgage.

Make your move (quickly)

The mortgage market is moving fast, which means that the interest rates you can consult today may not be there tomorrow. Interest rates today are on the rise, so if you make the decision to set your rates, take immediate action to capture what’s on the table.

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Having a fixed rate mortgage can sometimes save you money, but they always give you security. This path isn’t for everyone, but with record loan amounts and interest rates on the way up, it’s worth taking a closer look.

Arranging your mortgage is a decision that will affect your financial position for years to come, so make sure you plan wisely and get help where needed.

Ben Nash is a financial expert commentator, podcaster, financial advisor, and founder of Pivot Wealth www.pivotwealth.com.au, and author of the Amazon bestselling book “Get Unstuck: Your guide to create a life not limited by money.” www.getunstuckbook.com.au

Ben has just launched a series of free online money education events to help you get on the first financial foot. You can view all the details and reserve your place here.

Disclaimer: The information in this article is of a general nature and does not take into account your personal goals, financial situation or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it, and seek professional advice from a financial professional if necessary.

Originally published as How a Fixed Rate Mortgage Can Save You $160,000

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