There seems to be plenty of debate whether to fix the rate or stay variable, and without a crystal ball no one can predict what interest rates will do - no one can tell you to fix or not.

Let’s consider our options:

If we take an average of the propack interest rates. The current average 3 year fixed rate is around 6.79% (representing a 20pt discount for loan amounts over $250,000) as opposed to the current average discounted variable rate of around 5.11%. For the sake of the argument we’ll assume they both have similar annual fees.

Based on P&I payments of a loan for $250,000 the variable monthly repayment would be approximately $1360 whereas the fixed monthly repayment would be approximately $1630.  This represents a difference of $270/month.

Question - Would this additional payment be better utilised in principal payment?  Could you then use some of this additional $$ to help with higher repayments should interest rates increase significantly?

Whilst not professing to be an economic whizz and certainly not providing advice, a suggestion could be to pay the higher amount based on the 3 year fixed rate payment however leave the loan on a variable rate.  This should reduce the principal balance or provide additional funds in redraw.

The decision on whether or not to fix your loan must take into consideration a number of other key factors:

• Do you have any plans to move / sell your home in the course of the fixed rate? You could incur significant fees if you have to break a fixed rate.
• Are you able to make much higher repayments than your loan requires? Most fixed rates restrict at least to some extent the amount of additional repayments you can make during a fixed rate term & this may limit your potential interest savings. You may also be prohibited from accessing these additional repayments during the fixed term.
• Can you sleep at night with the threat of interest rate rises? If you can afford the higher repayment at todays fixed interest rates and you know you would be more comfortable knowing your repayments it could be a very good idea to fix.

A final thought, if you are still undecided you could consider fixing part of your loan – this could be a percentage or a fixed amount.