Is now the best time to lock in a fixed home loan rate?
"Is now the best time to lock in a fixed home loan rate?"
This is one of the most common questions we’ve been asked by borrowers over the past few months, after changes in the property market and the recent Reserve Bank of Australia (RBA) rate increase.
There’s always the chance that interest rates will continue to rise, and if they do, then homeowners and first home buyers will need to really think about what type of loan best suits their needs – fixed, variable or split.
Luckily, our highly experienced Mobile Lending Manager, Michelle Aalbersberg is here to spill the beans on the pros and cons of each option.
Michelle spends most of her days visiting people in their homes or workplace – helping with all their home loan needs. She’s been in the industry for over 30 years now, so she definitely knows her stuff. Take it away Michelle…
Fixed Rate Home Loans
What are they?
Fixed Rate Home Loans lock in your interest rate for a certain period: usually one to five years. After the fixed term finishes, your home loan will roll into a variable interest rate, unless you decide to fix your rate for another term.
One of the main benefits of a fixed rate home loan is certainty. Although it doesn’t sound very ‘exciting’, it’s actually a major advantage because you know exactly what your repayments will be over the fixed rate period. This means you can plan ahead and set financial goals with confidence.
It also makes budgeting much easier and means you can factor in things like short getaways or home renovations.
You will be protected against possible future interest rate hikes, so if the RBA or your lender increase rates during your fixed term, your loan wouldn’t be affected.
Set and forget
Once you set your rate, you’ll never have to worry about it changing during the fixed period. You can just sit back and relax knowing your payments will remain the same!
Traditionally fixed rate home loans have fewer features than variable rate home loans, but it’s not always the case (if you do your research).
However, most fixed rate home loans are likely to have limitations on one or more of the following features:
- Extra repayments - for example, on top of your normal/minimum repayments, you can’t pay more than $10,000 extra each year, before penalties apply.
- Offset accounts - you may not be able to link an offset account to your loan.
- Redraw facilities - you may not be allowed to redraw any additional payments that you have already made. Although you can with us!
You may have higher fees if you choose to exit your fixed rate agreement before the end of its term or if you pay off your loan early. These are called ‘Break Costs’ or ‘Early Repayment Adjustment’ fees.
Just like you won’t be affected by a rate increase you also won't benefit from a drop in interest rates, should variable rates decrease.
Variable Rate Home Loans
What are they?
Variable Rate Home Loans aren’t fixed, which means your minimum repayments will increase if interest rates go up and decrease if interest rates fall, or your lender may shorten your loan term instead. Rates may change in response to decisions made by the RBA, as well as other factors like lenders wanting to attract new customers or cover costs.
Variable loans usually let you make unlimited additional repayments at no extra cost, which can save you interest and help you pay off your loan sooner.
Variable loans often have extra features such as unlimited redraws on any additional repayments or the ability to save on debit interest by setting up an offset account.
It’s usually easier and cheaper to refinance if you have a variable rate home loan, as you won’t have a fixed term ‘contract’ to break - meaning you might avoid possible penalties.
If rates go up, so will your repayments! This could happen multiple times during your loan term and can be sudden
It can be harder to budget since you can’t be sure how or when interest rates will move, making it more difficult to anticipate expenses.
Watching your rate
You’ll need to keep an eye on your interest rate and consider switching or renegotiating with your lender if it gets too high. You might want to schedule reviewing your loan and rates into your calendar periodically to make sure you’re making the most of the flexibility.
Why not have both?
Most home loans will have the option of splitting your loan into part variable, part fixed. Loans can be split to varying degrees, but the most common is 50 per cent variable and 50 per cent fixed.
This way you will have the certainty of knowing how much your repayments are each month on the fixed rate portion of your loan, as well as taking advantage of interest rate drops on the variable part of your loan.
Important questions to think about
The type of interest rate you choose could affect the amount you save over the lifetime of your loan, so it’s important to ask yourself these questions before making your decision.
What are the current rates?
If a fixed rate is lower than a variable rate that means $$$ in your pocket from day one if you choose to go fixed and the variable rates stay as they are or go up. But if they go down you might end up paying more.
Will interest rates go up or down?
Although there’s no way to know for sure how interest rates will move, there are several economic indicators that can give you an idea of where the mortgage market is heading. So, keep up to date with the latest news from financial experts.
Do you want predictability or flexibility?
Understanding what you prioritise more, flexibility or stability, might help you understand what option you prefer. A fixed rate home loan has predictable repayments so you know what you’ll be paying and when. Whereas a variable rate has more flexible repayment options, so you may pay less, or more, during your term and have access to other loan features.
What home loan features do you need?
Extra repayments, free redraw and an offset account are all features that can help your money work harder… But are they worth it for you? Before deciding on your loan structure you will need to think about which features are must-haves and which matter less for your situation.
How quickly do you want to pay off your home loan?
If you are committed to paying off your home loan as soon as possible, a variable rate may be a better option because of the unlimited extra repayments. You may be charged a fee if you repay your loan before the end of the fixed rate home loan term.
Will you be looking to sell in a few years' time?
If you are looking for a short-term property, then a variable home loan may be a better option for you. If you sell your home while you’re in a fixed rate term, you could be charged break costs.
Do your own research
- Have a look online at different fixed and variable home loan rates/offers (remember to look at a range of fixed terms, as the rate varies between terms).
- Use our Loan Comparison Calculator to compare your favourite home loan options.
- Once you’ve got a shortlist, speak to each lender as they may be able to offer a more competitive deal.
- Most importantly - remember to take your own personal and financial situation into account when deciding (will you be changing jobs soon? Planning to start a family? These lifestyle changes can impact your decision).
As you can see there are both pros and cons for fixed, variable and split rate home loans. Ultimately your decision should be based on your own financial needs and goals, now and for the future.
Our lending experts can help talk through your options. Make an appointment with one of our friendly Mobile Lending Managers, like Michelle, to talk through your options via phone, email, video call or even a home visit at a time that suits you.