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.
Lifehacker’s weekly Loaded column looks at better ways to manage (and stop worrying about) your money.