Australian Property News

Better off with variable

Posted on Monday, March 15 2010 at 9:28 PM

As a general rule most people are better off sticking to a variable rate for their home loan rather than a fixed rate, according to RateCity chief executive officer Damian Smith.

"The only reason you would move to a fixed rate is if you thought interest rates would spike very, very sharply and very, very quickly – if you thought they were going to go up a couple of per cent very quickly," he says.

On average, Smith notes, interest rates go up in small increments.

He says for the most part the benchmark standard variable rate is more than one percentage point lower than the benchmark fixed rate.

Right now, he says you'll be better off starting on day one with a standard variable rate and you’ll be substantially better off if you make that repayment and add the extra repayment that you would have made if you were on a fixed rate.

For instance, on a $300,000 home loan he points out that the current variable rate is 6.63 per cent, while the fixed rate is 7.7 per cent.

The repayments for a fixed loan on that amount would be $2256 and for the variable loan they would be $2051; if you make the extra $200 payment Smith says you'll be much better off after three years, having shaved more off your principal.

"So for most people the best option is to take the variable rate loan but pay more than the minimum," he says.