Anyone who might look at the current advertised fixed rates may think that you would need to be a fool to accept anything but a fixed home loan. Even with variable rates dropping to a historic lows, fixed rates are in many cases at least 50 basis points lower than their variable alternative.
Most experts believe that we are close to the bottom of the rate cycle and fixing now (if you intend to fix at all) is worthwhile. However little attention is given to the risks and potential losses that one may be subjected to in fixing their mortgage rate. These need to be considered.
Variable rate falls further
There is no guarantee that the variable rates will stay where they are. While chances are they will not fall lower than the fixed, they certainly can. We are part of an international economy and can not look only at the local economic indicators to predict future rate movements. Should the variable rates come down more than we are anticipation you may feel cheated in being unable to take advantage of the lower mortgage rates.
Need to urgently sell or pay down mortgage
Personal circumstances may change. Whereas today you may think that you will stay in your current home for a long time, tomorrow your plans may change. There may be a need to move interstate or a family expansion requiring more space.If you sell the house during the fixed loan period and attempt to repay your mortgage, there will be a contract brake fee. In some cases these fees can be tens of thousands of dollars.
Perhaps you receive some windfall such as an insurance payout or an inheritance. This may mean that you have some money and would like to pay down your mortgage. However fixed loan contracts will generally preclude the borrower from paying down loan principal. Doing so constitutes a breach of contract and a hefty penalty may be incurred.
Loan offset account
Perhaps you have some savings that you like to place into a loan offset account which allows you to offset the interest earned on the account against the interest expense of the mortgage. Fixed mortgages do not come with a 100% offset account. This means that you would need to either split your loan into a variable and fixed component, where you can offset the variable part of the loan, or pay down the mortgage using your savings before fixing for a period of time.
Fix only part
To ensure that your exposure is reduced to fluctuating rates you may decide to fix only a part of your mortgage and leave a part variable. That strategy will reduce any penalties that you may incur if you need to sell early, but will also only offer partial benefits as you are still exposed to market movements of the cash rate.