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Fixed, variable or split: pricing the decision

The question is not which rate will be lower. It is how much certainty is worth to your household, and what it costs to buy.

7 min readMortgage Superheroes
Fixed vs Variable

Every borrower asks the same question and it is the wrong one. Nobody in this industry knows where rates land in three years, and anyone who tells you otherwise is selling something. The question that can be answered is narrower and more useful: what would it cost you to be wrong?

Fixing is insurance, so price it like insurance

A fixed rate is not a bet on the market. It is a premium you pay for a known repayment. Sometimes the premium is small and the certainty is worth a great deal — a single-income household with a new baby and no buffer, for instance. Sometimes the premium is large and the certainty buys nothing you actually need.

  1. Write down the fixed rate and the current variable rate. The difference is the premium.
  2. Multiply the premium by your loan balance. That is the annual cost of certainty in dollars.
  3. Ask whether an unexpected increase of that size would change how your household lives. If yes, the premium is probably worth it.
  4. Check what you give up: most fixed loans limit extra repayments and do not offer a full offset.
What break costs actually respond to

Rate moves

a fixed loan broken while wholesale rates are lower than when you fixed can carry a five figure cost. Broken when rates are higher, it can cost almost nothing.

“Split loans are not fence-sitting. They are the correct answer for most households with a buffer they intend to keep using.”

Priya Raman

Why the split usually wins

A split puts part of the balance on a fixed rate for repayment certainty and leaves the rest variable, where the offset account and unlimited extra repayments still work. You give up the chance of being entirely right in exchange for removing the chance of being entirely wrong, and you keep the flexibility that makes an offset worth having.

The split ratio should follow your buffer, not a round number. If you expect to hold thirty thousand in offset and pay down twenty thousand extra over the fixed term, the variable portion needs to be large enough to absorb both. That is arithmetic, and we will do it with you before anything is signed.

MS
Mortgage SuperheroesAustralian mortgage brokers

Written by the Mortgage Superheroes broking team — the same people who write the applications. We publish what we tell clients on the phone, in plain English, and update it when lender policy moves.

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