With interest rates being at historic lows over the past year, many homeowners have started to think about whether this is the time to lock in a good interest rate for their home loan. By fixing your interest rate, you can do just that.
Having a fixed interest rate means that your lender has ‘fixed’ a specific interest rate to your home loan for a period of time. Fixed rate periods usually last between 1 and 5 years, but they can sometimes be extended or even broken (however, this will typically bring about penalties).
Here we’ll explain why you might consider fixing your mortgage interest rate, compare fixed interest rates with variable ones, and look at the likelihood of interest rates rising in the near future.
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Opting for a fixed interest rate can be a good choice for borrowers who prefer to have a sense of financial stability and certainty. This is because with a fixed interest rate, you’ll owe the same amount of money each month on your home loan repayments and won’t be subject to market fluctuations. Naturally, this makes budgeting and organising finances much easier since you are protected against rising interest rates.
Concern over interest rates potentially rising is a major reason that borrowers consider fixing their rate. Many Australians have enjoyed super low interest rates in recent months, but are aware that these won’t stick around forever.
If you fix your interest rate now, you could potentially lock in a low rate for up to 5 years! So, if the cash rate rises and banks increase interest rates accordingly in the next couple of years, you’ll still be getting a good deal.
But a fixed rate home loan isn’t the right move for everyone. Keep reading to learn about the pros and cons of fixing your interest rate.
|You enjoy consistency by paying the same amount each month during the fixed term||You won’t benefit if interest rates drop|
|If interest rates rise, you won’t be affected||If you want to refinance before your fixed term ends, you could be required to pay break fees|
|Budgeting is made easier by knowing exactly how much you’ll owe on your home loan repayments||Making extra repayments, overpaying or paying off your mortgage early could also result in break costs|
|You can take advantage of low interest rates by locking one in for 1-5 years.||Limited options for loan features and most lenders won’t allow 100% offset accounts.|
A home loan with a variable interest rate can fluctuate at any time. So, if interest rates are low, your interest rate will also be low. However, if interest rates soar, you can expect yours to do the same. It’s likely that you might owe a different amount of interest from month to month.
While a borrower who favours stability may be put off by the notion of a variable interest rate, someone who likes flexibility might be interested. Variable rate home loans come with fewer rules and regulations. You can make extra repayments and refinance without having to worry about being charged break fees.
You can also take advantage of a number of home loan features, such as an offset account or redraw facility. An offset account is basically like a transactional savings account linked to your home loan balance. You can use it for everyday expenses, but it’s a good idea to keep the balance high because the funds in this account offset the interest you are charged on your home loan.
For example, if you had a $500,000 home loan balance with $50,000 in an offset account, you’d only be charged interest on the first $450,000 of your mortgage.
A redraw facility provides similar interest benefits, but operates a little differently. Essentially, it pools any extra home loan repayments you make, reducing how much interest you are charged and reducing your loan balance. However, you are able to withdraw funds from your redraw facility to spend how you like.
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|If interest rates are low, your monthly repayments will be too||If interest rates rise, so will your monthly repayments|
|Refinancing is easier and you won’t be faced with break costs||Managing your finances can be more challenging as repayment amounts vary month to month|
|You can make unlimited extra repayments which can help you pay off your home loan faster and reduce how much interest you pay over time||Higher risk of mortgage stress|
|Access to various home loan features, such as offset accounts, redraw facilities and home loan portability.||Lenders have the ability to change their interest rates independent of RBA cash rate decisions. Lenders may do this to increase their revenue or recuperate costs.|
We can’t know for sure when interest rates will rise and fall, but they will eventually. The best thing to do is to keep an eye on the RBA cash rate. Interest rates are set by individual banks and lenders, but they are heavily influenced by the Reserve Bank of Australia’s (RBA) official cash rate.
In April 2021, the RBA stated that they do not intend to increase the cash rate for the next 3 years. However, lenders can and do determine their own interest rates independent of changes to the cash rate. So, if a lender wants to increase revenue, or is experiencing rising costs, they may increase interest rates to account for these changes. On the other hand, they may also lower interest rates in order to remain competitive and gain customers in a saturated market.
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Not sure whether a variable or fixed rate is best for you? Well, you might be able to do both. A split home loan allows a borrower to fix a portion of their home loan, while the remaining part gets a variable interest rate.
The split doesn’t need to be a 50:50 divide. So, if you prefer stability, you could repay 70% of your home loan at a fixed interest rate, and the remaining 30% at a variable rate.
Deciding to fix your mortgage requires a level of commitment. If you aren’t sure whether now is the right time for you, get in touch with a mortgage broker or Home Loan Specialist to go over your options.
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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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