Is now a good time to fix your rates?

Is now a good time to fix your rates?

During 2020, home loan interest rates plunged after cuts were made by the Reserve Bank of Australia in an effort to free up extra cash and help boost the economy. The historic lows have continued to stay steady well into 2021 but although interest rates seem very attractive and affordable right now, they could be set to increase as soon as the second half of 2022.

With that in mind, many homeowners are considering fixing their home loan interest rate and if you are wondering if you should, too, read on to find out if now is a good time to fix your rate and what it could mean for your overall financial situation.

What is a fixed-rate loan?

A fixed-rate loan is a type of home loan with an interest rate that is locked in for a period of time; either the full life of the loan or for just a portion of it. Typically, a fixed rate will only be in place for a maximum of five years, but by shopping around it is possible to switch from one fixed-rate loan to another, depending on your personal circumstances. In most cases, however, fixed-rate loans will switch over to a variable interest rate after the initial fixed-rate period.

Are fixed rates cheaper than variable?

Yes, in general, fixed rates are cheaper than variable rates, but there is a key reason why. There are usually break costs if the loan is repaid early and this is to deter borrowers from selling the property and discharging the loan or otherwise repaying the debt in full during the fixed-rate period.

Alongside being cheaper than variable rates, the biggest benefit of a fixed-rate loan is being able to budget. The payment will be the same each period (for e.g., fortnight or month) and therefore fixed-rate loan account holders have a clear overview of how much they must pay into their mortgage for the fixed-rate period.

Are there any downsides to a fixed-rate loan?

Locking in an interest rate means that you won’t be able to shop around without penalty (such as high break fees) if interest rates were to drop below the rate you had agreed to for the fixed-rate period. The present home loan interest rates are so low, though, that it is unlikely they will decrease further in the near future.

What is a variable interest loan?

A variable interest loan has a rate that fluctuates with the economy and can change to suit market conditions and the business strategies of lenders.

What are the pros and cons of a variable interest loan?

It is generally easier to refinance your loan or switch lenders if you have a home loan with a variable interest rate. It can also be just as easy to negotiate a lower rate to bring yours in line if the market experiences a drop. Sometimes simply requesting a rate change can be more beneficial than switching over to a fixed-rate loan for a period of time.

The key negative to a variable interest rate is not knowing exactly what your mortgage payments will be each period if the rate increases. As interest rate hikes are likely to occur in the coming year, a fixed-rate loan may be more beneficial if you are taking out a new loan soon and want to retain the same rate for a longer period of time.

What is a partially fixed loan?

A partially fixed loan is a product that some lenders offer, which combines both fixed-rate and variable interest rate loans. Usually, a portion of the loan will be set up with a set rate while the other portion will be subject to the variable rate. In a similar way to a fixed-rate loan, a partially fixed loan will usually only allow the fixed portion to continue that way for a short period of time, after which it will switch over to a variable rate. Although this seems like an inconvenience, it can still allow you to save money you may not have saved if the whole loan was on a variable rate.

If you are thinking of taking out a new home loan or switching to a fixed-rate loan, it is important that you consider all of the implications on your personal finances, particularly in the long term. A mortgage broker will be able to assist you in finding a loan that best aligns with your financial objectives and circumstances. Contact our expert Mortgage Brokers on (07) 4052 0750.