Nobody Wants A Fixed-Rate Mortgage

There's a dizzying range of mortgage options for home buyers these days, but in one area it seems we've already made up our mind: nobody wants a fixed-rate home loan.

The rationale between choosing fixed-rate or variable is pretty obvious. With a fixed-rate loan, your payments are predictable: no matter what happens to official interest rates, you know what you'll be paying. With variable rate, your monthly payments vary depending on the set rate. The former makes it easier to plan a budget; the latter lets you take advantage of periods of low interest rates.

While there's a case to be made for either approach, it seems that new home buyers aren't convinced of the virtues of certainty. According to mortgage broker Mortgage Choice, less than 1% of the loans it helped arrange in January were fixed-rate, with virtually every customer opting for some sort of variable rate loan. While those numbers are from a single source, they do suggest that variable rates are now very much the default option.

It's also a relatively recent trend. "Less than two years ago, one in three new borrowers chose to fix their interest rate," Mortgage Choice senior corporate affairs manager, Kristy Sheppard said. "With further rate rises on the horizon for 2010, you would think more new borrowers would want to lock in an interest rate on part or all of their home loan. Instead, the trend says a lot about the ability of these borrowers to withstand a number of increases to repayments and their reluctance to pay a premium for the feeling of security and comfort that steady repayments offer."

While an important factor, rates aren't the only element to consider. The ability to make additional repayments (particularly useful if you want to reduce your mortgage quickly) or to pay out a loan early without penalty are obvious examples of important factors to consider. Nonetheless, if this trend continues, the number of fixed-rate options on the market may be rather smaller the next time there's a major sustained rise.

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Comments

    It seems people are taking on board the message that fixed rate mortgages are not financially wise right now. The time to fix was in the months straight after rates dropped last year. Now, they are at a big margin compared to floating rate mortgages as the banks price in where they think rates will end up over the period. (Remember you're unlikely to beat the banks in guessing future rate movements.)

    The message coming out of the popular financial media right now is: if you can afford to pay that extra premium, why not get a floating rate mortgage now and pay ahead? And it seems people are listening to that now.

    Ever since interest rates fell, the difference between fixed & variable has grown quite a lot which would explain why people are holding off fixing... (At least this was the case when I refinanced in December)

    I fall more into the "homeowners are morons and always fix at the top of the cycle and never at the bottom" camp.. but what do I know?

    Early last year I got my home loan at 5.99% fixed for five years. I think I was quite lucky, it really is quite a gamble unless you've done a lot of research into interest rate trends. Not just in the last year, but over the last 10 to 20 years. It gives you a much better idea of the peaks and troughs of the cycles.

    I'd be interested to see what these figures look like now, we have seen many people starting to choose fixed mortgages as banks are offering reduced fixed interest rates. The way we have always thought has been that banks generally price fixed interest rates so that they win in the end...but we are questioning now whether some of them might provide a better average rate over the next 2 or 3 years.

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