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.
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:
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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.
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:
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Read our summary table for an overview of the difference between fixed and variable rate home loans:
|Variable interest rate||Fixed interest rate|
|Your interest rate is largely determined by the RBA cash rate||Borrowers lock in an interest rate for a specific period of time|
|If the cash rate decreases, your interest rate will usually do the same (and vice versa)||Fluctuating interest rates will not impact fixed rate mortgages|
|Lenders can still alter your interest rate even if the cash rate hasn’t changed||Knowing how much you’ll owe each month can make budgeting easier|
|Monthly repayments can fluctuate which could make it more difficult to manage your finances||Good option for those who prefer stability and consistency|
|Can usually make unlimited extra repayments and have full access to loan features like offset accounts and redraw facilities||Often unable to make uncapped extra repayments and loan feature options may be limited|
|Can be a more stressful, risky option||Overpaying or paying your loan off early could lead to penalties|
|Refinancing won’t incur break fees||If you refinance from a fixed rate loan before the end of the fixed period, you’ll likely have to pay break fees|
With a split rate home loan borrowers can divide their mortgage into two portions:
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.
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:
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.
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