Rates are rising - should you fix or split yours?

Home loan interest rates are slowly starting to rise after months of record low rates. If you want to make the most of the current low rates, it could be time to consider switching to a fixed rate mortgage so that you can lock in a good deal.

In this article we’ll explain why interest rates are rising, and we’ll look at fixed rates versus variable rates, and whether splitting your loan could be a smart move.

• Related: How to prepare for an interest rate increase
• Related: Time is ticking to make the most of low home loan rates

Why are interest rates rising?

Interest rates have been at historic lows over the past couple of years, and as helpful as this is to homeowners and buyers, it’s not the norm. So, you could say that interest rates are ‘correcting’ or reverting back to more regular levels, rather than rising in a worrying way.

Nevertheless, let’s look at why interest rates are likely to rise:

1. The Term Funding Facility (TFF) is ending: The TFF was launched in March 2020 by the Reserve Bank of Australia (RBA) as part of their COVID-19 response. It encouraged lending to households and businesses by providing lenders with high amounts of funding at a very low interest rate (0.25%). This helped lenders drop mortgage interest rates to very low levels, but the TFF closed for new drawdowns in June 2021.
2. The cash rate could rise: The RBA’s Official Cash Rate is likely to be increased at some point in the near future after sitting at 0.10% since November 2020. When the cash rate increases, lenders will likely up interest rates for loans to account for their higher borrowing costs.
3. Post-pandemic economic recovery: With the economy on track to recover well from the pandemic, there is less of a need for rock-bottom interest rates.

Is it time to fix your interest rate?

As interest rates increase, so will your mortgage repayments if you’re on a variable rate. But, if you lock in a fixed interest rate, you’ll pay the same amount each month and won’t have to worry about further rate increases for the remainder of your fixed rate term.

If you fix your interest rate now, you could lock in a potentially low interest rate for the next 1 to 5 years!

Fixed rates are still low, and can provide some stability during a turbulent time. But they aren’t for everyone as they come with certain limitations when compared to variable rate loans.

Keep reading to learn more about whether a fixed rate mortgage could be right for you, or whether you’d be better suited to a variable rate or even a split loan. A split rate home loan can offer the best of both worlds for an undecided borrower.

If you’re really unsure, it’s a good idea to consult with a financial advisor or a mortgage broker.

What is a fixed interest rate home loan?

A fixed rate home loan is charged interest at a fixed rate. This means that for a specified period of time, your home loan interest rate won’t change – regardless of changes to the cash rate.

With a fixed rate home loan:

• Your repayments will be the same every month, so you’ll know exactly how much you’ll owe ahead of time
• Your interest rate is ‘locked in’ for a specified fixed period of time, usually between 1 and 5 years
• You’ll be protected against interest rate rises, but you won’t benefit from interest rate drops
• You may not be able to access certain loan features like redraw facilities and offset accounts, or their usage might be limited (i.e. most lenders won’t allow 100% offset accounts for fixed rate mortgages)
• Break costs are a financial penalty applied for breaking the terms of a fixed rate home loan e.g. refinancing before the end of the fixed period, making more extra repayments than permitted, repaying your loan early etc.

What is the difference between a fixed and variable rate home loan?

Read our summary table for an overview of the difference between fixed and variable rate home loans:

What is a split loan?

With a split rate home loan borrowers can divide their mortgage into two portions:

1. A fixed portion: this portion of your loan will be repaid with a fixed interest rate
2. A variable portion: this portion of your loan will be repaid with a variable interest rate

This way, you can make the most of the benefits of both a fixed and variable home loan structure. So, if you want to protect yourself against the effects of higher interest rates, but would still like the functionality of a variable rate home loan, you could consider splitting your loan.

For example, with a split rate mortgage you can still make unlimited extra repayments on the variable portion of your loan. Many lenders place restrictions on the amount of additional repayments you can make with a fixed rate home loan.

Is it a bad idea to have a variable rate when rates are rising?

It’s not necessarily bad to opt for a variable interest rate on your home loan when interest rates are rising. Although you may be subject to higher interest rates than someone who has locked in a fixed rate, the flexibility of a variable rate might still be preferable to some borrowers.

With a variable interest rate, you can:

• Make unlimited additional repayments
• Get access to loan features like offset accounts and redraw facilities
• Refinance at any time without being subject to break fees

If you’re not sure whether to lock in a fixed interest rate, or enjoy the flexibility of a variable rate loan, it’s smart to speak to an expert. Lendi’s Home Loan Specialists are on hand to answer your questions and tell you more about your home loan 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.