When the Reserve Bank of Australia (RBA) announced the historic low cash rate of 0.1%, most lenders slashed their fixed rates to below 2% and held off on reducing their variable rates.
To fix or not to fix?
Seeing fixed rates advertised below 2% seems enticing, however, will you benefit from a fixed rate home loan?
Let’s understand the features of a fixed-rate home loan:
- The interest rate will be locked in and remain the same for the period you choose to fix the rate – which can be up to 5 years or even longer.
- During the fixed period, the interest rate remains the same, even if the bank/lender changes their rates.
- Fixed-rate home loans do not usually come with 100% offset accounts, redraw facility or ability to make much extra repayments.
- If you refinance or close the loan when you sell your property during the fixed period, then you will have to pay break costs.
- When the fixed-rate period ends, it will automatically switch to a variable rate – sometimes this can be higher than the current market rates (so keep an eye on this!).
When it comes to choosing a home loan, getting a lower interest rate is important as you don’t want to be stuck with an uncompetitive rate compared to other lenders.
There are benefits and disadvantages to fixing your home loan.
The pros of a fixed rate home loan are:
- You save more since the fixed rates are the lowest they’ve ever been, and your repayments don’t change during the fixed period.
- You can budget accordingly since your repayments are consistent until the fixed period ends.
- If variable rates rise during the fixed period, it does not affect you. You still get a great deal as your interest rates and repayments are lower.
However, there are cons of a fixed rate home loan:
- These loans have limited features and do not offer the flexibility of a variable home loan. Most fixed-rate home loans do not offer a 100% offset account, and most place a small limit on the amount of extra repayments you can make while it’s fixed.
- If you want to refinance or close the loan when you sell your property before the fixed period ends, break costs can be very expensive.
- It might be difficult to manage repayments once the fixed period ends and the interest rate reverts to a variable rate (which may be higher than the fixed rates you’re paying right now, making the repayment higher).
The decision to choose a fixed rate home loan depends on your individual circumstances. If you want to pay off your mortgage faster, then a variable rate home loan might be a better option because you can make unlimited extra repayments and pay off the loan as quickly as possible.
However, if you’re keeping the property for a long time, and prefer the certainty and peace of mind of knowing how much your repayments will be, then a fixed rate home loan could be a better option.
If you want the best of both worlds, you can choose a split mortgage option – this is a feature that lets you fix a portion of the home loan and keep the remainder on a variable interest rate.
Talk to our mortgage brokers to discuss your situation by calling us on 1300 889 743 or filling in our free online assessment form.
Should I refinance to a fixed-rate home loan?
- Going from variable to fixed could be an option since there are no break costs. However, fixed home loans do not offer the features and flexibility of variable home loans, so you may end up sacrificing some features you need, to gain a lower interest rate.
- If you’re currently in a fixed-rate period, it’s best not to refinance as you will likely have to pay hefty break costs.
- If you have less than 20% equity, then you will have to pay Lenders Mortgage Insurance fees again when you refinance, which may outweigh the benefits of gaining a lower interest rate.
- There are costs associated with refinancing like discharge fees, new loan establishment fees, etc., and the refinance process could be time-consuming and tedious.
- You can use a refinance calculator to find out how much your savings might be, should you choose to refinance to a fixed-rate home loan.
Our mortgage brokers are here to help discuss your options on whether getting a fixed rate home loan is right for you. Call us on 1300 889 743 or fill in our free online assessment form.