Fixing your home loan to avoid rising rates might sound like a sensible option, but the numbers say otherwise. A long-term review shows that most borrowers who fixed their mortgage over the past 20 years paid more than those who stuck with a variable rate. This was especially the case for three-year fixed terms. With concerns about Reserve Bank rate rises leading lenders to lift fixed rates, many borrowers are tempted to lock in. However, the odds do not appear to support that choice.
When interest rate increases are on the horizon, fixed home loans typically become more appealing to borrowers looking for stability. At present, with rising speculation that the Reserve Bank may raise rates again, banks have started increasing their fixed rate offers. In November alone, at least 18 lenders lifted fixed mortgage rates and more are likely to follow. In this climate, fixed loans may seem more stable but that security could come with added cost.
Over the 20 years to 2020, Reserve Bank mortgage data showed that fixing a mortgage led to financial loss about two times out of three. On average, borrowers lost 0.7% each year when they chose fixed rates over variable. In comparison, the average gain when someone outperformed the variable rate was just 0.36% per year, which is a much smaller benefit. This data excludes the pandemic years when record-low rates led to a surge in fixed loan uptake.
Although fixed rates can provide stability in repayments, the figures suggest that for most borrowers they are a riskier financial decision. Banks profit from fixed loans as they offer consistent repayments, and brokers can benefit from longer commission tails. Borrowers, on the other hand, may face break costs or hidden fees if they end the loan early. During the pandemic, nearly 50% of home loans were fixed but that number has since fallen below 10%, showing that borrower habits have moved back towards favouring variable rates.
There are rare times when fixing can be worthwhile. For example, in 2021 fixed rates dropped below 3% and some buyers or investors may have valued the predictability of repayments more than possible cost savings. Still, the long-term evidence is clear that fixed loans do not consistently deliver better value across the board.
