With interest rates at an all-time low, you may be wondering if it’s a good time to refinance your home loan or possibly consider a fixed interest rate. Before you rush to fix your home loan rate, there are a few considerations and complexities to determine if it’s right for you. We explore these below.
What’s the difference between a fixed and variable home loan?
An interest rate refers to the amount of interest a lender charges the borrower in exchange for borrowing their money. Typically expressed as a percentage, interest rates can be fixed, which means they are set at the current rate for a pre-determined period. A variable interest rate means the interest accrued on your home loan will vary along with market conditions.
Why would I choose a fixed rate?
If you’re budget conscious, you may be more likely to consider a fixed rate home loan as it means you know exactly what your repayments are and can budget accordingly. For many, the certainty of a set rate is what makes a fixed rate loan so attractive, particularly in a time like now when we have all faced so much uncertainty in the wake of COVID-19.
When you opt for a fixed rate loan, the rate is set for a period of time, typically 1, 3 or 5 years. Even if the market fluctuates, your repayments will remain the same. If you fix your rate at a time when the rates are considered low, you could potentially reduce the overall amount you end up paying on your home loan.
Currently, interest rates are unprecedently low and as a result, first home buyers and homeowners are flocking to secure fixed rates, but there are also benefits for variable loans.
Why would I choose a variable rate?
While the repayments do vary when it comes to variable loans, they often tend to provide greater flexibility compared to fixed rate loans when it comes to repayments, including the option to pay off your mortgage faster without incurring interest rate break costs.
Additionally, some variable rate loans offer additional features such as offset accounts or redraw facilities which can help to reduce the loan balance, you’re paying interest on while still providing you with the ability to access your finances when you need.
These features are often not part of a fixed rate loan.
To learn more about the varying loan types, please visit our blog on,’ Different Types of Home Loans.’
When should you fix your home loan rate?
There isn’t a right or wrong time to fix your home loan rate. Essentially, it comes down to your personal situation and your current financial position. However, if you are comfortable with your current interest rate and believe the rates are likely to rise in the future, it may be a good time to consider fixing your loan.
Before you decide whether or not it’s a good time to secure your rates, consider the following:
- Do you plan to pay off your mortgage earlier or make substantial additional payments?
- Is there a chance you may sell your home during the fixed period?
- Are you planning to undergo extensive renovations?
- Would you like to refinance your home during the fixed period?
- Would you consider changing lenders during the fixed period?
Fixed rate loans often have less flexibility as opposed to variable loans and in some instances, you may face limitations like hefty fees if you are in any of the situations referred to above.
Do I have any other options?
You may have the ability to split your mortgage into two accounts, so a portion of the mortgage is variable, and the other portion is fixed. In this scenario, you may be able to reap the benefits of both options with a fixed lower rate but also having an offset account through the variable portion of your loan.
It’s also important to think about the current financial landscape. While the impacts of COVID-19 are easing in many ways, it will be a while before we’re able to stand back and completely understand the impact on our economy. If, for example, you choose to fix your home loan rate for three years and in that time, you experience job loss, chose to sell, or have unexpected substantial costs, you may face increased challenges if you’re on a fixed rate home loan. According to the ABC, if you have to end your contract, you’ll be charged a break fee based on how much you owe and how long was left on the fixed term.
It’s all about research and making sure you are carefully considering all your options and the varying costs and features of the varying loan types. Before you decide to fix your loan, it’s a good idea to speak with an experienced finance broker. Our team of financial brokers offers no-obligation consults. To enquire, click here.