April 23, 2019

Is it time to fix your home loan?

More than 85% of Australia’s home owners now have a variable rate loan showing they aren’t too worried about future interest rate rises.

Who can blame them when the Reserve Bank has left rates on hold at just 1.50% since August 2016?

The thing is, history has a habit of repeating itself and, if rates start rising again, many home owners will be blaming themselves for complacency in years to come.

Beneath the rosy facade of low interest rates, Australians are more indebted than ever before and many homeowners could experience real financial difficulty if variable rates start rising.

Economic indicators all seem to be pointing in different directions and the future is very hard to predict.

With that in mind, it is a good idea to wipe the dust off the old fixed-rate mortgage contract and have a look at what’s inside.

What is a fixed rate home loan?

First things first, let’s clarify what a fixed rate loan actually is. A fixed rate home loan is one where the interest rate is fixed for an agreed period of time - usually 1, 3 or 5 years. Throughout that period, you know exactly what your repayments will be each month, regardless of what the Reserve Bank does with its official rate or what happens on international financial markets.

In return for the fixed rate, your loan will be subject to a number of limitations that are not applied to a variable rate loan, such as no offset, and fees for breaking or varying the contract.

At the end of the fixed-rate term, the loan will usually revert to your lender’s variable rate.

What are Fixed Rate Pros and Cons?

Pros

  • You are immune from any rate increases
  • You can budget easily because you know your exact repayments for years to come

Cons

  • They generally cost a little bit more
  • If rates fall you will not enjoy any savings
  • They do not come with an offset
  • They usually charge a break fee if you want to refinance

 

So, is now a good time to fix your interest rate?

Before we get out the crystal ball and try to forecast the future of interest rates, let’s consider something that should be more predictable and more important – your personal circumstances.

Ultimately, you need to decide if it’s wise for you to choose fixed or variable based on your own short-term and long-term plans.

When is fixing a bad idea?

In return for the security of fixed rate loan, you’ll lose some flexibility and will face exit fees if you make changes to your loan or extra repayments during the fixed rate period.

That means the key question to ask is how much flexibility you’ll need over the fixed-rate period you are considering.

It could be a bad idea to fix your loan if, during the fixed term:

  • You want to make large extra repayments on your loan
  • You plan to renovate using equity from the property
  • You want to sell your property
  • You want to refinance your home loan

Before you ask if now is a good time to fix, remember to ask: “is now a good time for me to fix.”

Now, let’s look in the cup and read those economic tea leaves.

Are home loan interest rates going up?

Predicting home loan interest rates has always been complicated but in the last couple of years, it has become even more difficult.

This is because the link between the Reserve Bank of Australia’s official overnight cash rate and home loan interest rates has been broken.

You wouldn’t know if from the media coverage but the Reserve Bank no longer effectively “sets” home loan interest rates at its board meeting each month.

Instead, they are determined by a range of factors including the RBA’s cash rate, the rates available on international funding markets where lenders get much of their capital and domestic competitive pressures.

What do markets predict about interest rates?

Right now, the median economist surveyed by The Australian Financial Review expects the Reserve Bank to keep its rates on hold until June 2020. But the futures market - where institutions lock in future interest rates – is predicting two rate cuts, implying the RBA will cut official rates by 0.5% to 1 per cent by August 2020.

Confused yet? Well, it just gets worse because this doesn’t even consider what will happen to funding costs for lenders on international markets, which changes week by week.

If professional economists and investors can’t agree on which way rates are going, what chance does anyone else have?

Are fixed interest rates cheap?

The good news is that right now, lenders are offering some excellent fixed interest rates.

At loans.com.au, we offer competitive fixed rates. View our rates here.

For a price lower than most other lenders’ variable rates, you get the confidence of knowing your repayments are locked in for the next three years!

What if I can’t decide on a fixed rate?

If you can’t decide between a fixed or a variable rate, there is always a third option.

That option is a split loan, where part of the loan is fixed and the remainder is left on a variable rate. For example, you might fix 40 per cent of the loan, and leave 60 per cent variable.

That way if rates rise, your repayment will only increase on the variable part, but won’t change on the fixed part. Talk about hedging your bets!

Pros and Cons of a split loan

Pros

  • If rates go up, your repayments will only rise on the variable part
  • You will still get the features of a variable rate loan over the variable portion including an offset and the ability to make extra repayments

Cons

  • If rates drop, you only get the benefit on the variable part
  • You will still be charged break fees if you refinance

 

How to decide

At the end of the day, the decision on whether to fix your home loan or not comes down to your own circumstances and whether you can afford to take a risk. The good news is that if you feel like fixing is the right move, there are some great rates in the market to give you peace of mind at an amazingly low rate.

Recommended reading

Loan calculators to best estimate your repayments

Our five online loan calculators are handy tools you can use.

VIEW ARTICLE

Should you choose a fixed rate home loan?

If you’re considering getting a fixed rate home loan, here are some pros and cons to help you with your decision.

VIEW ARTICLE

What is a fixed rate home loan?

If you're trying to decide whether a fixed rate mortgage is your borrowing match, read the advantages and disadvantages of a fixed interest rate here.

VIEW ARTICLE
 
Call us on
13 10 90
or
Request A Call
7am - 7pm, Monday to Friday. AEST