Fixed Rate Loan Popularity Wanes - Should I Ride the Rollercoaster?

Opting for a fixed rate home loan over its variable cousin is a scenario that plays out the old tension between paying a little more money to have peace of mind, and paying a little less now but with the risk of losing money later. In fact, when you start thinking about how fixed rate home loans function in your day to day life, you'll see several similarities to insurance policies! Recently the growth in fixed rate loans has levelled off - it seems that home loan customers are becoming more confident in the state of official interest rates, and feel less need of the security of a fixed rate. Will this be the right decision for you? We explore what's going on in the world of fixed and variable rate loans, and whether you should join the growing number of people choosing to ride the variable rate rollercoaster.

Trend towards rate fixing slows
Since the start of the New Year, the proportion of new home loans going onto a fixed rate has slowed substantially. It looks as if the next rise in the cash rate will be in the middle of the year, or even later, so more homeowners may be looking to fix in several months.

Discount rate loans booming
However, discount rate loans have become steadily more popular over the past 12 months, and in January represented 23.6% of new home loan approvals. Standard variable rates, though, are still the favourite with around 30.7% of new approvals for standard variable rate loans.

Should I choose a fixed rate home loan?
There are several things to consider in deciding whether to choose a variable or fixed rate loan:
• Variable rate loans are usually slightly cheaper than fixed rates
• There is a switching fee to change from variable to fixed rate - though it is usually quite manageable. Commbank's is currently $70.
• Fixed rate loans may not allow you to make extra repayments as freely - you may have a cap on extras, or may not be allowed to make any extra repayments.
• There is usually no option to withdraw extra repayments from a fixed rate home loan
• Usually, repayment holidays are not allowed

In general, fixed rate loans are as restrictive for homeowners as they are for banks ... so if the interest rate is not going up, it can feel as if you're paying a premium for absolutely nothing.

However, when the rate's going up you'll be very glad not to be one of those 'struggling Aussies' battling with interest rate rises.

There are plenty of news articles and predictions available on the net, with expert opinions that tell us when the interest rate will go up. The trick then is to be relatively certain rates won't drop too much during your fixed term ... and that is more tricky! Simply paying attention to the news and being ready to act will help you keep your home loan repayments to a minimum.

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Hilary Briss is an avid finance writer and regularly writes articles on home loans and income protection insurance.