Blog Should you fix your home loan this new year?

Should you fix your home loan this new year?

02 February 2021
Should you fix your home loan this new year?

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After a historic year for interest rates, 2021 is likely to be far calmer in the home loan market, so should you fix your home loan?

There were three cash rate cuts from the Reserve Bank (RBA) in 2020, two in March, the first time the rate has been cut twice in a month, and another in November. Two 25 basis point and one 15 basis point cut later and Australia’s cash rate now sits at a record low 0.10%. RBA Governor Phillip Lowe has stated the cash rate is unlikely to be raised for at least three years, with economic recovery from COVID expected to be uneven and protracted. He’s also ruled out negative rates, meaning the cash rate is likely to stay at 0.10% for some time. As a result, variable interest rates are also unlikely to see much movement. So with rates at rock bottom and seemingly unlikely to move, should you fix your rate?

What are the benefits of a fixed rate?

The main benefit of a fixed rate is the certainty it provides. A fixed-rate means your interest rate is locked in for a period of time, typically anywhere from one to five years. Consequently, your repayments are also locked in, which means you’re safe from any potential interest rate rises which will increase your repayments. Having your repayments locked in means you have cashflow certainty and can budget accordingly for the period you’ve fixed. For example, if your repayments are locked in at $2,000 a month for five years and will go up to $2,200 when the fix ends, you could put away that extra $200 each month for five years for a holiday or renovations. If you want the benefits of a fixed rate and variable rate, you can split your loan.

What are the benefits of a split loan?

A split loan refers to splitting your home loan amount, where one is charged at a variable rate and the other is charged at a fixed rate. You can split your loan however you please, should your lender allow it, so 60% could be variable and the remaining 40% fixed, for example. In this example, if you had a $600,000 mortgage, $360,000 would be charged at a variable rate, and the remaining $240,000 charged at a fixed rate.

The benefits of a split loan are it affords you the benefits of both variable and fixed-rate loans. It provides the security a fixed-rate loan gives you through cashflow certainty with your repayments locked in, while also giving you the flexibility of a variable rate loan. A variable rate loan allows you to make additional repayments, use a redraw facility, and take advantage should interest rates fall. You can also split according to your circumstances, giving you even more flexibility.

variable-rate also allows you to make use of an offset account. An offset account is a transaction account linked to your home loan, where the money in it is offset against your home loan amount when interest is calculated. This reduces the amount of interest charged over the life of the loan, reducing the length of the loan and potentially saving you thousands. For example, if you had a $500,000 home loan and had $50,000 in your offset account, interest would only be charged on $450,000 of your loan for the period of time the funds are in the offset. Many people have their pay deposited directly into their offset account, with the majority of home loan rates now superior to savings account rates.

How a fixed rate or split loan can save you money

In the table below, you can see the savings a split loan or fixed rate can afford you. We’ve used our three year 1.99% p.a. (2.70% p.a. comparison rate) fixed rate offer as an example, on a principal and interest loan with an amount of $500,000 paid back over 30 years.

Variable rate

Fixed rate at 1.99% p.a.

Fixed 60:40 split

70:30 split

3.00% p.a.

Monthly repayments: $2,109

Total interest payable: $258,888

Monthly repayments over fixed period: $1,845

Total interest payable: $242,162

Monthly repayments over fixed period: $1,950

Total interest payable: $248,492

Monthly repayments over fixed period: $1,924

Total interest payable: $246,760

3.5% p.a.

Monthly repayments: $2,246

Total interest payable: $308,281

Monthly repayments over fixed period: $1,845

Total interest payable: $282,348

Monthly repayments over fixed period: $2,005

Total interest payable: $292,360

Monthly repayments over fixed period: $1,965

Total interest payable: $289,707

If you want to take advantage of a great low fixed rate, check out our three year 1.99% p.a. (2.70% p.a. comparison rate) offer now. There are no monthly or ongoing fees, multiple loan splits are available, and an interest-only option is available. To chat with one of our friendly loan specialists today, call 13 10 90.

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