Deciding whether a fixed rate home loan suits your familial and financial situation can be tricky.
However, last week’s Reserve Bank of Australia (RBA) decision to increase the cash rate for the first time in a decade makes it an ideal time to determine what home loan road you’re going to take – or to reconsider a decision you’ve already made.
The cash rate is now set at 0.35% but you’ve got a few weeks up our sleeve before the central bank’s next monthly cash rate announcement on Tuesday, June 7.
So let’s start with the basics of fixed-rate loans and go from there.
Fixed but not flexible
As the name suggests, the interest rate on fixed-rate home loans won’t change until the loan period expires, unlike variable rate home loans.
This is the main reason why homeowners love fixed-rate loans as they enable you to always know in advance how much your mortgage repayments will be (instead of waiting in dread for the RBA’s cash rate announcements and then figuring out what’s happening with your lender’s interest rates).
At the same time, if cash rates drop – as they have done for 10 years and particularly in the last two years – you can’t enjoy the benefits of this downscale.
How long does my fixed rate remain fixed?
It all depends on your lender but fixed-rate home loans are generally set for several years, with popular periods being two, three or five years.
After this period ends, watch out for changes.
What happens when my fixed-rate period ends?
Firstly, prepare well in advance for the expiration of your fixed-rate period.
Consider your budget and how much extra (or less, cross fingers!) you’ll pay in mortgage repayments.
You may want to refinance your loan with the same or another lender.
If you like, you can choose to “refix” your fixed-rate loan too.
Either way, this is a great time to consider your short and long-term mortgage future.
What if I change my mind about my fixed-rate decision?
You can but it ain’t financially simple or beneficial because it’s not just interest rates that are fixed with fixed-rate loans.
These loans are also fixed in that you can’t end your loan early for whatever reason.
If you do, your lender will charge you with high costs, known as “break fees“.
This includes whether you decide to repay higher sums than you and your lender originally agreed to.
What are the benefits and disadvantages of fixed-rate loans?
Make no mistake – as with most decisions in this world, there are good and bad sides to the fixed-rate story.
- Your interest rate will never change during your loan period, regardless of RBA cash rate verdicts
- This unchangeability ensures you can enjoy home loan stability
- You can plan your budget well in advance
- Fewer flexible benefits such as offset accounts and redraw facilities (depending on your lender)
- Very high “break cost” fees for larger repayments or breaking a loan contract, unlike variable rate loans
NB: Google “how to calculate break costs” for different ways on how to do this
Should I lock into a fixed-rate loan after the RBA’s cash rate hike?
Boom! This is the question virtually every homeowner has been asking themselves this past week!
Unfortunately, there’s no easy answer but saying that, as a general rule of thumb, fixed-rate loans are designed to protect you from rate hikes.
And with real estate experts predicting an RBA rate increase for months already, further upscales in the coming months are almost inevitable.
After the RBA announcement last week, the bank’s governor Dr Phillip Lowe indicated there would be more rate changes with his inflation forecasts “based on an assumption of further increases in interest rates.”
As well, CoreLogic research director Tim Lawless suggested higher cash rates implied higher rates for variable mortgages with fixed-rate home owners in a better place than their variable cousins.
“The recent rise in fixed-term mortgage lending is … helping to insulate homeowners from higher interest rates,” Mr Lawless said.
At the same time, fixed-rate loans have doubled in the last year, according to AMP Capital chief economist Dr Shane Oliver.
In short, we can’t answer this question easily.
But this is definitely a good time to consider refinancing whichever loan you currently hold, or review what loan you’re leaning towards.
Is a fixed-rate loan right for me?
Again, there is no easy answer to this question.
Variable rates are just that – highly variable.
So, risk-averse home owners who appreciate stability, or who know their employment or other financial factors may change in the near future, may be happy to run with a fixed-rate loan, regardless of where the RBA takes cash rates.
A good compromise can be a split loan – part fixed-rate and part variable rate.
We encourage you to take the time to consider every loan box, do your research and talk to independent advisers.
It doesn’t hurt to talk with your current lender either to see if they can offer you better interest rates or other options, preferably without too many fees and charges involved.
We’re here to help
If you’re becoming overwhelmed by facts, figures and finances or simply need an extra head to help you decide if a fixed-rate loan is for you, your friendly Lending Loop team can help.
We’ve got more than 40 of Australia’s biggest banks and specialist lenders at our fingertips (so to speak) and our service is free to enjoy.
So give us a call today at Lending Loop.