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Your mortgage: fixed or variable...or both?

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With the recent increase in interest rates by the Reserve Bank, and with the prospect of further increases well into next year, you may be wondering how these rate changes affect your mortgage.

There are two basic types of mortgage:

  1. A “fixed” mortgage has a fixed rate of interest applicable over a fixed period of time.
  2. A “variable” mortgage maintains a variable rate of interest.

A fixed mortgage has the advantage that you know in advance what your repayments are going to be over the period involved. However, there are interest-rate penalties if, for whatever reason, you repay the mortgage or refinance it before the end of the period.  

A variable mortgage has the advantage that you can repay it or refinance it at any time, although most mortgages have termination fees that apply if you change it within the first few years. Many mortgages also enable you to pay more and get ahead of your regular payments, and re-draw them at a later stage. However, you are at the mercy of increasing interest rates in a time of volatility.

It would seem sensible to have a fixed mortgage, but look at the interest rate carefully. Generally, they tend to be a bit higher than the current variable rate and this reflects the fact that most institutions expect rates to increase over the long term. For example, at present, one major bank has a variable rate of 7.80%, but has fixed rates for 3, 5 and 10 years of 7.10%, 7.88% and 8.14% respectively.

If the Reserve Bank decides that the rate increases have done their job of containing inflation and it starts reducing rates again in a year or so, you may find that your fixed mortgage is costing you more than a variable mortgage. Be aware that you can also choose a combination of fixed and variable loans, which may suit your circumstances better.

Talk to your Bongiorno adviser if you are contemplating refinancing your mortgage, to ensure that it is the best one for you.

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