With the current economic climate in Australia, in particular the ongoing battle with high inflation, causing a string of interest rate rises, people have been frequently asking us “Should I fix my home loan?”

There is no right or wrong answer to this, and it really depends on lots of different factors. A fixed rate home loan will be a good move for some, and others will do better with a variable rate. 

You may have heard a lot about fixed rates in the media lately, with a high volume of Australian mortgage holders having their fixed rate home loan expire, or set to expire this year, following them locking down their interest rate during the historical low interest rate period we have recently experienced. These people capitalised on low fixed rates, but will now be facing what has been coined a “mortgage cliff”, with their monthly repayments set to come in substantially higher than they have been paying though their fixed term. You can read more about the mortgage cliff phenomenon here. 

In the meantime, facing an almost monthly barrage of interest rate rises, borrowers are keen to hear how they can mitigate higher repayments, and are keen to investigate the fixed rate option. Lets explore the idea of fixed rate home loans and whether it could be a good option for your situation. 

What is a fixed rate loan?

A fixed-rate home loan means that the interest rate is locked in for a stipulated term – usually between three and five years. Fixed rate home loans protect borrowers from any sudden increases in interest rates by the RBA. 

By contrast, a variable rate home loan is when the interest rate changes in line with market conditions and the cash rate set by the Reserve Bank of Australia (RBA). Mortgage repayments can fluctuate with the lenders interest rate, which may or may not be in line with the RBA increases or reductions of the cash rate. 

Is it worth it to fix my home loan?

If you’re considering fixing your home loan to protect yourself against any further rate rises, it’s worth noting that after 11 consecutive rate rises, Australia may have reached a peak. While economists are divided as to whether we are close to the end of this cycle, the predictions of the big 4 banks, suggest that we may expect to see at least a slowing down or the rises before things stabilise. 

However, there are lots of reasons beyond the current interest rate landscape that may have you wondering if fixed rate loan is a good option for you. 

Advantages of a Fixed Rate Loan 

The main benefits of a fixed rate home loan are: 

  • 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 with set monthly repayments.
  • The main advantage of a fixed-rate home loan is the financial certainty it can provide. The interest that you pay on your mortgage will not change for a stipulated period, which is usually between three and five years.

Even if your lender increases their interest rates, your repayments will remain the same. First home owners who are getting used to making regular repayments may find this much less stressful.

What are some disadvantages if i fix my Home loan?

  • Rate cuts won’t be passed on to you. If rates start falling before your fixed loan expires, you may be stuck paying a higher rate.
  • You may not be able to access loan 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, or even if you sell your home 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.

The main disadvantage is not being able to respond to changing financial conditions. When interest rates are going down, it can be frustrating to know that a variable rate mortgage would see you paying less each month.

It may be the case that to fix your home loan may not be the best option for you: 

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.

So some instances in which a fixed rate loan may not be the most financially savvy decision may include when:

  • 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.

Split Loan Option

You can also hedge your bets with something called a split loan, where a portion of your loan is variable and a portion is fixed. This option allows you to make extra repayments on your variable amount and clear your debt faster without paying any penalty fees.

With so much uncertainty in the market, it becomes really important to use an experienced mortgage broker Perth to help you weigh up your options., From there, we can help to negotiate with lenders and simplify the whole home loan process for you, taking any stress out of the equation. Once you are a client of ours, we are always looking out for your best interests, which includes an automatic and ongoing assessment of your rate and situation following which we will get in touch if we have a better home loan solution for you. 

Get in touch with us today to make an appointment to discuss your situation in detail with someone who will listen.

All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.

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