With banks starting to raise fixed rate interest home loans, this question should be asked: is someone going to better off in a variable or a fixed rate home loan?

This is never an easy question to answer definitively because personal situations can differ borrower to borrower. And it depends on what rate you got, when you got it and for how long.

When you want to get out of the loan and whether you want to pay it off early are other questions that could determine if you’d be better off with a variable compared to a fixed rate home loan.

And there’s another swinging factor that could determine what’s best: can you trust the Reserve Bank Governor Dr Phil Lowe when he says the cash rate will be at 0.1% until 2024?

Now Dr Lowe has never exactly said those exact words but he has implied this, and some in the media have interpreted his words as exactly that. On the other hand, I’ve used the George Costanza line from Seinfeld that say “it’s not a lie, if YOU believe it!”

If the good doctor is telling us the truth, then someone with a $600,000 loan (around the average mortgage size in Australia) would only gain around $1,320 in pure cash terms by sticking to the best fixed rate over the best variable rate for only three years!

But let me emphasise that this depends on whether we can trust Dr Phil!

If after a year the Australian economy is booming, inflation is rising here and in the US, then the pressure to start raising interest rates would be intense on the RBA. And it could show up with a plummeting Australian dollar.

That’s all speculation on the negative for interest rates but it’s actually speculating on a very positive economic outlook for the Oz economy. Remember, the Treasurer said in the recent Budget that the economy in 2021/22 would grow at a gangbuster rate of 4.25%. Our average growth rate was 3.3% between 1992 and 2017, so 4.25% is big.

Let me share with you my figuring to show how the $1,320 gain for being in a fixed rate loan shows up.

Using the comparison website Rate City, I found what looked like the best 3-year fixed and variable rates for home loans.

With the fixed rate home loan from UBank, the monthly repayments are $1,250 while the variable repayments to Athena are $1,270. That’s a $20 difference and there are 36 months until May 2024 so $20 times 36 equals $720.

That’s not much to give up if you like the options of a variable rate home loan so you can pay your loan off quickly without penalty, having a redraw facility and other pluses that a lot of fixed rate loans don’t offer.

But what if Dr Phil has to give us a couple of 0.25% interest rate rises between now and 2024? Well, that changes the cash comparison greatly, making a fixed rate loan better for your cash flow bottom line.

If the variable rate goes from 1.99% to 2.49%, the repayments rise from $1,270 a month to $1,344. And let’s say, there’s 18 months of a higher interest rate, then you could be out of pocket by $94 a month for 18 months, which is $1,692.

And by the way, based on history, when the RBA is worried about inflation and an overheating economy, rate rises often go in threes. And I should say a lot of people reading this might have mortgages over $600,000.

If we double the borrowing to $1.2 million, the cost of Dr Phil potentially breaking his promise becomes $3,384!

If this has made you think about your borrowings, let me give you a few more warnings:

• First check out your interest rate on those comparison websites.
• Look at the ‘suck you in’ headline rates that can be so low but the comparison rates can be really high. Look at the actual monthly repayments and any other fees that actually make the loan you’re comparing more expensive than you think.
• Comparison rates are more valuable when comparing two variable home loan rates. With fixed, they aren’t as easy to interpret. With these loans, look at your total payments — monthly and any other charges.
• One of the best headline or advertised variable rate home loans is a very low 1.99% but the comparison rate is, wait for it, 2.47%! The Athena loan I used in my example has a variable rate of 1.99% and a comparison rate of, wait for it, 1.99%, which says there are no additional sneaky charges that other lenders throw in.
• If this is too much for you to do, try a couple of mortgage brokers so you can compare what they can find for you in terms of best rates.

So what are the big messages?

Get loan smart, use comparison websites or a mortgage broker, and if you have overborrowed on a variable home loan, you better hope Dr Phil can keep his promise on interest rates.