With post-pandemic recovery on everyone’s minds, 2021 is the year to think about whether your financial situation is working for you and how you could save money. For homeowners, this could be the time to refinance and consider switching between a fixed and variable interest rate for your mortgage.
In this article, we’ll explain the difference between fixed and variable interest rates, whether fixing your rate in 2021 is a good idea and what will happen with interest rates this year.
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Fixed and variable interest rates are available to both owner occupiers and property investors. Both options come with advantages and disadvantages, but it will ultimately depend on your needs and financial situation.
A fixed rate home loan has a set interest rate for a specified period of time. Any changes to the RBA cash rate, which influences the interest rates offered by banks and lenders, will not affect borrowers on fixed rate home loans.
To decide on fixed interest rates, lenders will predict the likely costs involved with holding the loan money for that period of time. Most fixed terms are between 1 and 5 years, and at the end of the term you can refinance to another fixed rate loan or switch to a variable rate.
Fixed rate mortgages often come with more rules and restrictions than their variable counterparts. Here are some examples:
Unlike a fixed rate mortgage, mortgages with variable interest rates are directly impacted by fluctuations to the cash rate. So, if the cash rate decreases, your lender will usually lower your interest rate too. Of course, the opposite also happens, so it’s important to be aware of potential interest rate spikes while on a variable rate home loan.
However, even if the cash rate doesn’t change, variable interest rates can shift. Lenders may change interest rates based on demand, to account for costs, to mirror competition, and to attract new customers.
Variable rate mortgages allow for more flexibility in how you make repayments. For example, you can typically make as many extra repayments on your loan as you like. You’ll also have access to useful loan features such as an offset account, redraw facility and loan portability.
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Traditionally, fixed interest rates for home loans have sat slightly higher than variable rates. But right now, many lenders are offering lower fixed rates.
Why? Well, lender competition is high in 2021. There are dozens of different Australian mortgage lenders in the market, so if they want to attract and retain customers, they have to make it worthwhile.
Today’s abundance of fixed rates is not necessarily because banks are envisioning interest rates spiking in the coming years. Rather, it’s more about lenders trying to be competitive and secure customers for longer. The days of sticking with one lender for 20 years are long gone and refinancing isn’t as arduous a task as it once was.
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Lenders are realising that most Australians are not content with staying on an average or subpar home loan for years. So in this volatile economy, lenders are hoping to secure revenue for longer by offering staggeringly low fixed interest rates to lock customers in for a set period of time.
These days the main reason for homeowners to lock in a fixed interest rate is to ensure certainty with your home loan and repayments. Fixing in a rate you’re comfortable repaying over the next few years can be a comforting decision. Unless you are a property finance expert, it’s not always the best idea to try to outsmart the market which can be highly volatile.
The benefits of fixing your interest rate in 2021 could be appealing to those wanting to take advantage of current low interest rates. Additionally, fixing your interest rate will give you a lot more security and the comfort of knowing exactly how much you’ll owe each month.
It’s important to note that the RBA have stated that they don’t intend on changing the cash rate for another 3 years as Australia continues its post-pandemic economic recovery. If this is the case, it means that borrowers may be able to wait and fix their interest rate later if they are concerned about rising interest rates.
But if you are thinking about going variable then you should be aware that it’s common for lenders to sporadically introduce low interest honeymoon deals for short periods of time, as well as having other reduced interest offers. Lenders may raise interest rates to account for rising costs on their end.
Here are some pros and cons of fixing your rate:
Yes, you can switch from a variable interest rate to a fixed rate and vice-versa. With a variable interest rate, you aren’t locked into a fixed term, so you can refinance and switch with relative ease. The process is now much easier than it was years ago thanks to the rise of online home loan platforms like Lendi. Nowadays with the digitisation of the application process, refinancing can be done in as little as 3 weeks.
On the other hand, refinancing from a fixed rate can be challenging unless you wait until your fixed period ends. If you want to refinance part-way through your fixed term, your bank sees this as you ‘breaking’ your loan terms, so they will generally charge break fees. Break fees will vary from lender to lender and can be very costly, and it’s important to weigh up your options based on your own personal circumstances - speak to a home loan specialist to see if breaking is a financially beneficial option for you.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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