A fixed-rate loan locks your interest rate for a set period of time, generally from 1-5 years. During your fixed-rate period, your repayments will stay the same, regardless of what happens to the interest rates in the market.
Why Are Interest Rates Rising?
The cash rate is now at 3.10%, up three full points since May 2022. It is now at its highest since 2012. Senior economists predict that the cash rate will reach 3.85% by the middle of 2023 and remain stable for the rest of the year before lowering by early 2024. The Reserve Bank Of Australia (RBA) has hiked the cash rate eight months in a row as inflation in Australia has remained high.
How Does This Affect My Monthly Repayments?
Let’s examine how consecutive cash rate hikes have increased borrowers’ monthly repayments. The following chart compares monthly repayments before the first rate hike, in May, and after the most recent hike, in December. (These example loan repayments were determined using our repayment calculator, based on the lowest variable rate we can offer over a 30-year term as of December 2022. Rates are subject to change from this date.)
|Loan Amount||Monthly Repayment Before The First Hike, April 2022 (1.89%)||Monthly Repayment After Most-Recent Hike, December 2022 (4.46%)||Difference|
Note: The 4.46% rate is based on the lowest available from our panel of lenders as of 27 December 2022.
Should I Fix My Home Loan In 2023?
Whether you should switch to a fixed rate depends on your home loan objectives and financial situation. Here are some factors to consider.
If You Fix Your Interest Rates Now
- Rate rises won’t affect you until your fixed term ends. Experts have predicted that there are more rate hikes ahead and they will not come down until early 2024 at the earliest.
- Your monthly repayments will remain the same, saving you money.
- Budgeting is easier, as you have predictable monthly repayments.
- Rate cuts also won’t affect you. Rates can start falling before your fixed loan expires. In this case, you are stuck paying a higher rate.
- You might not be able to access features such as extra repayments, redraw and offset facilities.
- You will have to pay large break fees if you refinance or switch back to variable rates before your fixed-rate period expires
- Once your fixed-rate period ends, your lender will roll you to higher variable rates unless you refinance or make other changes.
This table shows the increases in the cash rate over the last year on a two-year fixed home loan from each big four bank:
|Two-Year Fixed Rates|
|Feb 2022 (Cash rate: 0.10%)||Dec 2022 (Cash rate: 3.10%)||Difference|
Note: The rates shown are for principal-and-interest repayments. They are current as at 28 December 2022 and are subject to change.
Fixed rates have increased by more than 3 percentage points in less than a year. They are likely to continue this trend until they reach around 7%. Homebuyers need to compare their current variable interest rate and the new fixed rates on offer to find out if switching to fixed rates can help.
At the beginning of 2023, the cash rate sits at 3.10%. These are the predictions as to how high rates will go, offered by senior economists from big four banks:
ANZ: Cash rate will go as high as 3.85% by May 2023 with a series of 25-basis-point hikes each month.
CommBank: Cash rate will rise to a peak of 3.35% by February 2023, when it will potentially pause.
NAB: Cash rate will rise to a high of 3.60% by March 2023 and remain stable for the rest of the year before lowering again by March 2024.
Westpac: Cash rate will rise to 3.85% by 2023 and potentially decline by 2024.
If we look closely at the predictions, interest rates are expected to peak in the middle of 2023 and will start declining from early 2024. Assuming that banks pass rate rises in full, fixed rates are expected to find their ceiling at around 7%.
The pace of rate rises over the last year suggests that they have not reached a peak yet. Borrowers who think a fixed rate might be a good option for them might consider a term of less than two years. This would save them from increasing rates in 2023 and allow them to benefit from the anticipated falling rates once their fixed period expires. If they lock in a rate for more than two years, variable rates might fall before their fixed term ends and there would be a high chance of them being stuck paying a higher rate.
At the present moment, fixing appears less wise for those who are looking for long-term benefits. Fixed rates are relatively high and the cash rate is predicted to reach its peak soon. If borrowers can make the repayments until the cash rate reaches around 4%, it might be better if they stick with variable rates now.
If You Keep Your Variable Rate
- Save money in interest and repayments if interest rates start falling earlier than predicted.
- You can refinance with low or no break fees and reduce your repayments.
- You are more likely to be able to make extra repayments and access additional features, such as offset facilities.
- Be sure you are able to adjust to increasing repayments if the rates keep rising. If not, you could risk missing repayments or even default.
Major Things To Consider With A Fixed-Rate Home Loan
The main reason borrowers opt for fixed rates is that they expect rate hikes in the near future and want to avoid them. Since lenders are increasing fixed interest rates in anticipation of variable rates continuing to climb, however, borrowers need to evaluate how much their monthly repayments would be at any fixed rate offered and whether it’s worth it to pay that increased repayment in exchange for cost certainty.
When A Fixed Rate May Not Be A Good Idea
- Interest rates are falling
- Interest rates are increasing but likely to peak very soon
- You plan to refinance your home loan during the fixed-rate period; you would have to pay hefty break fees
- You plan to renovate or build a new home by using the equity in your property
- You plan to sell the property
- You would like to access the additional features of a variable home loan, such as extra repayments, offset accounts and refinancing.
Borrowers should keep these few things in mind before fixing their loan:
Direction Of Fixed Rates
Fixed rates are priced in a forward-looking way. If the market expects rates to fall, then fixed rates may be cheaper than variable rates. Fixed rates may be higher than variable rates if the market expects rate rises to continue.
Duration Of Fixed-Rate Period
Most people choose their fixed term based on what they believe the future of interest rates will be. Shorter fixed-rate terms won’t protect from interest rate hikes very long. You can negotiate and get a better deal with a longer fixed term (over five years), but this restricts the flexibility of your home loan for a longer time. The most popular options are 3-5 years.
You can get a split loan, keeping a certain portion of your loan variable and locking the remaining portion into a fixed rate. Doing so allows you to make extra repayments on your variable amount and clear your debt faster without paying any penalty fees.
Think wisely about whether the benefits of switching to fixed rates outweigh the costs. After you lock in, you’ll need to pay high exit or break fees if you want to end your fixed term early and switch back to a variable rate.
After your fixed-rate period ends, lenders revert your loan to a variable rate, which is often much higher than the rate you were paying before reverting.
Explore Other Features
See if your lender offers additional features on fixed-rate home loans. Extra repayments, split loans, redraw accounts and offset facilities can all be beneficial.
We Can Always Help!
If you still have not decided to fix your loan, we can assist you in:
- Comparing interest rates and negotiating the best deal for you
- Weighing up the benefits of fixing your loan
- Checking the fees and extra costs
It’s always a gamble, as nobody can predict the future of the economy. That’s why it’s best to talk to a broker to assess your needs and options when you apply for a loan. Home Loan Experts’ specialist mortgage brokers can help you decide if switching to a fixed-rate home loan is the best option for you. Call us on 1300 889 743 or enquire online for free today.