Scott Pape, the barefoot investor, suggests staying variable

Scott Pape, the financial adviser, broadcaster and author of The Barefoot Investor, has explained why he is keeping his home loan variable despite the fact that the banks are currently offering lower fixed rates. He says he envisages 2012 will be the time to “tart yourself around to the banks” to get a better deal next year.

“One reason is that having the security of locking in your rate comes at a cost: (usually) fixed repayments, and a hefty break fee if you want to walk.

“Banks behave in their own best interests,” he told subscribers to his website.

“A smarter strategy may be to wait and watch what happens with the unfolding debt crisis.

“We could see official interest rates come down, and cautious consumers continue to slow their borrowing (building approvals dropped 13.9% in September), causing banks to scramble for our business next year,” Pape wrote.

“That’s when I’ll be looking to lock in my rate.”

Pape, whose early days were as an investment adviser with EL&C Baillieu, says until then he will make extra repayments: the quarter per cent cut this week translates into an (average) $50 a month cut, or $41,000 saved in interest over the life of a loan.

Pape recently noted that since Wayne Swan banned exit fees, the banks had found another way to stop their customers from switching to get a better deal.

“Fixed-rate deals give them that power.”

But he noted there’d be a $600 establishment fee at the start, “and if interest rates drop lower than your fixed rate they will slug you with a ‘break fee’ representing the difference between the two rates, multiplied by the length of time left on your fixed contract – which can add up to thousands of dollars.”

“If you’re really struggling, locking in your rates can give you the security of fixed repayments, but for everyone else it’s too much of a gamble.”