Home loans – Fixed vs. Variable interest rates

I saw an interesting chart on Canstar which plotted the history of RBA Cash Rate, variable and 3-year fixed interest rates. This data is all available on the Reserve Bank of Australia website, look for A2 and F2 statistics.

History of cash rate, variable and fixed

I thought I would take it a step further and determine from past history if the 3-year fixed or variable rate would have been a better choice at a given time. I always believe that choosing a 3-year fixed interest rate was like gambling, it could either work in your favour or not, I am curious to see if I am right.

Given monthly data for the variable interest rate, to calculate which would have been the better choice I average thirty-six months of future variable rates. Because it is constantly looking three-years into the future, it can be observed that the data finishes in February 2010.

3-year average future variable vs. 3-year fixed

What can be observed is that the fixed rate is sometimes a better option (when under the three-years future average) and sometimes it is worse. Pre 2000, the fixed was mostly a poor choice, post 2000 the fixed rate is lower most of the time.

Finally, a difference of the two and it can be seen that it really jumps back and forth between good and bad. If we take the average of the difference we get 0.41%, which means the 3-year fixed rate is generally an interest rate of 0.41% worse.

3-year average future variable vs. 3-year fixed difference

Out of 233 months, 121 months (or 52% of the time) the fixed had a worse off interest rate and 112 months (or 48% of the time) the fixed had a better interest rate.

However, if we look at the 121 months from 2000 onwards, the variable interest rate is better off by an average interest rate of 0.23% which occurs about two-thirds of the time.

In conclusion, 3-year fixed rates these days do seem to have a good chance of having a lower interest rate for the locked-in period. That combined with the advantage of having a non fluctuating interest rate makes it a good choice.
I still would avoid them though, fixed rates make it difficult to switch lenders due to the extra fees payable.

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