Mortgages: Fixed or Flexible Interest?

by Chris Lang on November 18, 2009

Best MortgageThe following is an article by Jessica Bennet. Jessica is a contributing Financial Writer, Moderator and Community Mentor of MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems. If you have a query on mortgage related issues, you can simply discuss it with her in the Mortgage Forum.

The home buying process needs a lot of cool-headed calculations and a failure to do so can jeopardize your chances of getting a good deal, the most important aspect being your mortgage payments. The mortgage rates determine how much you will shell out each month. The main objective of taking out a mortgage is the same everywhere whether you are residing in the US or Australia. Whether you will opt for adjustable-rate mortgage (ARM) or fixed-rate mortgage (FRM) is something you need to decide well in advance so that you can figure out your monthly payments on mortgage. Let us consider the scenario in Australia.

Flexible-rate mortgage versus fixed-rate mortgage

When you opt for fixed-rate mortgage, your monthly payments are fixed throughout the term of your loan. So, you can plan out your finances accordingly. On the other hand if you take out adjustable-rate mortgage or variable rate mortgage, your payments will change depending on the prevailing rates in the market. If the mortgage rate escalates (in case of variable mortgage rate), so will your payments and if they drop your mortgage payments will drop too.

Variable rate mortgages are good if you plan to move within a short time period (for instance 3 to 7 years), it is a good option. This is because in case of ARM, the interest rate is fixed initially for a period 3, 5 or 7 years and escalates thereafter and rates start to fluctuate.

In Australia, the banks are the biggest lenders of mortgage extending approximately 92% of all originating loans, Commonwealth as well as Westpac constituting the mortgage bulk (as of August 2009). Reports suggest that as of December 2008, when sale of variable-rate mortgages was dropping, FRM or fixed-rate mortgage almost came to a standstill as there were no takers.

Studies reveal that the adjustable-rate mortgage or variable-rate mortgage in Australia stood at 8.87% for the last 59 years. This data is provided by Reserve Bank of Australia’s standard variable mortgage rates between January 1959 and February 2008. Surprisingly, the same rate exceeded 9% between July 1974 and August 1993. The mortgage rate slid back to 8.75% for a year and didn’t return below 9% until 1996 November.

Australian real estate market and recession

Recession has hurt investor sentiments of consumers to a great extent. However, the policy stimulus extended by the Central Bank and Federal Government has injected some confidence among the consumers. There was remarkable increase in consumer confidence that went up to a whopping 109.4% from 9.3% in July 2009.

In addition to this the $20 billion “cash handouts” have also added to the soaring confidence among consumers. So, if the rates are affordable for you, take the opportunity to own your dream home. However, it is important that you weigh the pros and cons of taking out a variable or fixed rate mortgage in Australia so that your mortgage payments are affordable and predictable.

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{ 4 comments… read them below or add one }

SEO Manchester November 21, 2009 at 3:07 am

Going for a variable rate interest here in the UK is probably the best thing to do in this credit climate.

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fishing organizations November 22, 2009 at 1:06 am

Maybe I’m old fashioned, but I like to keep thins simple concerning substantial things like buying a house. I go for a fixed-rate, better safe than sorry, I guess.

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Johanne November 23, 2009 at 1:07 pm

Fixed rates are always the safer option (at least here in the States). Some people may want to use flexible rates and then refinance to a fixed rate. But then again, many mortgages now have prepayment penalties which will cost you even more money to refinance.

If you don’t plan on staying in the house for long, renting rather than taking out an ARM is usually the more practical option.

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First Home Saver Account December 13, 2009 at 5:16 pm

I am afraid the window of opportunity for home buyers/owners to fix rates and come out on top has well and truly passed. The small window i beleive was around april-june this year when rates got down to around 5%!!
The moral of story is these opportunities only come by once in a while and isnt nice to have benefit of hindsight.

Mike

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