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.