When locking it in is a loaded question

Unlike borrowers in many other countries, Australian home buyers flock to variable-rate housing loans. Just 12.2 per cent of owner-occupier home loans are fixed-rate mortgages, despite their promise of greater certainty.

This is a plus for financial journalists, because it means there is plenty of interest in economic developments that influence Reserve Bank decisions. In recent months, however, more and more borrowers appear to be weighing up if it's right for them.

According to the Australian Bureau of Statistics, the share of borrowers opting for a fixed rate has edged up from 9.9 per cent in July 2012 to 12.2 per cent in January 2013.

It's easy to see why many people might be wondering if now is a good time to fix their mortgage. Average fixed rates are at the lowest level on record, according to financial comparison website Mozo.

As banks frantically try to spark growth in the home loan market, some are offering three-year fixed loans at interest rates of less than 5 per cent, compared with standard variable rates of about 5.6 per cent - a significant saving. But before rushing to exploit this, beware the traps.

Perhaps the most glaring risk is that future rates may fall further and you'll regret locking in a higher-than-necessary rate. This may sound obvious. But it has caught many borrowers out before.

In early 2008, for instance, most pundits were convinced interest rates were on the up and up because of the threat posed by inflation. After the Reserve pushed the cash rate to 7.25 per cent in March, some borrowers fixed their mortgages out of fear of further rises.

In fact, rates were slashed by 4 percentage points in slightly more than six months once the global financial crisis hit. Many were left with fixed mortgages that were far more expensive than the variable rates loans on offer. If this happens and you try to exit a fixed-rate mortgage, it can also involve major costs.

Remember the government's ban on home loan "exit fees" that took effect last year?

Importantly, that does not apply to "break costs" for fixed-rate home loans. These are basically the costs to the bank of cancelling a fixed-rate mortgage - and they can be pricey indeed.

Exactly how they are calculated is complex and depends on what's happening in bank funding markets. Therefore, break costs vary widely. But suffice it to say, they can be in the tens of thousands of dollars in some circumstances.

Another downside of fixed-rate mortgages is that they are designed in a way that allows you to pay back the same amount, every month, and no more.

This gives borrowers certainty, but means you may face additional costs if you want to make extra repayments.

As it happens, more and more borrowers have indeed been paying more than the minimum monthly repayment in recent months in a bid to get on top of their debt.

Last year, the Reserve Bank said that half of all borrowers were ahead of their mortgage repayment schedule.

Given these factors, experts often suggest borrowers should think about splitting their mortgage so that only part of it is fixed.

Fixed rate loan costs