Blog To fix or not to fix your home loan

To fix or not to fix your home loan

12 October 2017
To fix or not to fix your home loan

When borrowing to buy a home, you can generally choose either a variable rate loan or a fixed rate loan. A fixed home loan rate can be an attractive choice for many people because it locks in a fixed repayment for an agreed period of time, giving you protection against interest rate increases.

This makes budgeting a lot easier compared to a variable rate where you’re exposed to the risk of increases in the interest rate.  

The benefits of a fixed rate may encourage you to fix your loan, but there are also reasons why fixing your loan may not be a good idea. These can include restricted features and expensive break fees if you decided to make changes to your loan or refinance the loan during your fixed-rate period.

Determining whether you should fix or not fix your home loan is difficult. To help you with your decision-making, here are some questions to ask yourself before you decide to fix your loan:

  • Do you plan on keeping the property a long time? Typically, the term of a fixed rate loan is one to five years. A lot can happen during those years, and if you decide to exit during the term you will need to pay a break fee.
  • Do you plan on refinancing your property? There are a number of reasons why you might want to refinance your loan. You may want to free up some cash because you’re doing a home renovation, you need to pay for your child’s schooling, or money may be tight. Whatever your reason, it is more expensive to refinance on a fixed rate loan.  
  • Do you plan on making additional repayments? Making additional repayments towards your loan can reduce your loan term and interest payable. Unfortunately, you’re unable to make extra repayments with a fixed rate loan.

No one can predict future interest rates, not even the RBA. For that reason, the main thing to consider when choosing between a fixed or a variable rate, is whether you want the peace of mind of a fixed rate home loan.