Difference between fixed and variable loans

Probably one of the most frequently asked questions is should I fix my mortgage or stay variable? As many of you know, I have owned 28 properties over the past two and a half decades and rarely have I won the fixing game with the banks. Probably twice that I can remember.

Today, in Australia, 90% of the mortgage market is on variable and my advice would be to follow this high percentage and stay variable. Lending institutions today benchmark all loans at an interest rate of 8%. Give yourself the 8% test. Does the investment still stack up for you? Can you still afford the repayments? Eight percent has been the average interest rate here in Australia since 1920. For this reason, I encourage you to do the 8% test on all your investments moving forward.

A good example of whether to fix or stay variable is this story about my girlfriend and I several years ago. We were attending the Melbourne Cup together and were discussing our loans.

I had several mortgages that were hovering around 9.5 – 10% interest rate. My girlfriend on the other hand had fixed in at 7.5% and was delighted with her decision. At the time I was envious and she was joyous.

Ironically, the First Prime Mortgages collapse had been brewing in the background for the past twelve months, and we were largely unaware of it here in Australia. That same Melbourne Cup day was my first recollection of the news hitting the Australian public. First Prime Mortgages collapses in America!

My girlfriend is also an accountant and we were discussing the collapse and the dynamics of this potential domino effect. Would there be ramifications of this collapse on our shores and around the world?

On the interest rate front, the upside for me was that interest rates would fall down to around 5.5%, leaving the people who had fixed their interest rates shocked and surprised that interest rates could fall so dramatically in such a short period of time. The following year, at the Melbourne Cup, my accountant friend was still at 7.5% and I was down at the 5.5% level.

In setting my formula for success, a big part of this is having the right finance. What I have learned is this: flexibility in credit is very important when investing. Locking yourself in can cause problems in the future and sometimes part of having the right finance is having the flexibility to move around when you wish.


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