Are fixed-rate loans worth the security?
Fixed-rate loans have plenty to offer when it comes to interest rate security but is this security worth the opportunities that variable loans offer?
Fixed vs variable loans
Firstly, let's take a look at the difference between these loans and what they offer.
Fixed-rate loans
financial stability - your interest rate will stay the same for the life of the loan, regardless of cash rate rises or falls
less flexibility - homeowners will need to pay high fees if they change to a variable loan, make extra repayments or pay out the loan early
less helpful opportunities - fixed loans rarely offer offset and redraw facilities
Variable loans
financial instability - your interest rate changes when the cash rate does and/or when your lender decides to do so
more flexibility - it can be easier, and cheaper, to switch to another loan
helpful opportunities - enjoy offset and redraw facilities and make extra repayments without fees
Cash rate situation
Homeowners have enjoyed stable cash rates since November 2023 after the Reserve Bank of Australia (RBA) kept its 4.35% figure unchanged this month.
The cash rate drops that financial industry commentators have discussed for months may still occur this year.
But regardless of whether or not a drop occurs, almost a year of cash rate stability makes now a good time for fixed-rate homeowners to consider their loan's future.
Fixed-rate loans provide interest rate stability but come with less flexibility and fewer features compared to variable loans, which offer more opportunities but with financial unpredictability.
Should I stay (with a fixed loan) or should I go?
When considering this decision, start by talking to your lender.
Don't be surprised if your lender's variable rates are far higher than your fixed one (expect about a 1%-2% increase).
You should plan for potential RBA cash rate increases too.
Important questions to ask include:
What are the fees for cancelling a fixed loan and switching to a variable loan?
What variable loans do you offer and what are their interest rates?
What facilities do your variable loans include (ie redraw and offset facilities, extra repayments without charges etc)?
Do I have to pay extra for these facilities etc (as an example, ANZ's Standard Variable Home Loan requires a $10/month to utilise its offset facility)
What are the fees for switching to another lender?
After talking with your lender, get out your calculator and consider your fixed and variable options.
A variable loan may result in similar finances in your pocket to a fixed one especially given the possibility that cash rates may rise again.
On this point, study and research financial commentators' thoughts on the short and long-term future of RBA cash rates, including inflation data.
Talk to other people who have made the switch from fixed to variable and consider their advice.
From fixed to variable: what to expect
RBA cash rate announcements will no longer be safe days but ones to watch with caution, which will hopefully end in celebration
Plan your short and long-term financial future around cash rate changes
Reorganise your bank accounts to maximise your new offset and redraw facilities
Aim to make extra repayments as often as possible
We're here to help
Whatever home loan road you wish to take, Lending Loop would love to help you travel it!
Our off-market property website helps homeowners find the best home loans from more than 40 of Australia’s biggest banks and specialist lenders. And with all the services you need under one roof, we can also help you refinance your loan so you'll enjoy more cash in your pocket.
We're especially proud to have won Proptech Association Australia's first prize for Most Innovative Proptech company last month/July 2024.
So, what are you waiting for?
Get in the loop and give us a call today at Lending Loop.
