For the last two years the Reserve Bank of Australia (RBA) has kept the official cash rate on hold. It’s a record run for a stable cash rate. But the RBA has flagged several times that interest rates are more likely to rise than fall in the future. And already, we’ve seen a growing number of lenders raise their variable home loan rates – your own lender may be among them.
The bottom line is that the days of rock bottom interest rates may be numbered. Let’s take a look at whether now is the time to fix your home loan rate.
Why are some lenders hiking their rates?
We may have a stable cash rate here in Australia. But elsewhere in the world, for example in the United States, interest rates are rising as economic growth picks up.
For Australian banks, which source funds for home loans from a variety of different areas, this can mean paying more on the open money market. In many cases, this increased cost is being passed onto existing home loan customers.
The catch is that in today’s highly competitive mortgage market, lenders are keen for new business. This has seen some banks lower their home loan rates – but only for new customers.
Put simply, loyalty to your lender doesn’t always reap rewards.
Option # 1 – consider fixing
Interest rates are at historic lows. That means there’s plenty of scope for rates to rise and not much room for them to fall. The signs all point to the potential for higher home loan interest rates, and some home owners are seeing that happen right now.
Two options are available. The first is to consider switching to a fixed rate home loan. This can offer a range of benefits including certainty of repayments and protection against possible future rate rises.
The downside of fixing is that if interest rates fall, you won’t reap the benefits of a lower rate. The bigger issue is that fixed rate home loans are typically not as flexible as variable rate mortgages. Some allow extra repayments within annual limits, and a small number include offset accounts but you could face ‘break costs’ if a fixed rate loan is paid off early.
Option #2 Look around for a better deal
The second option is to stick with a variable rate home loan but take a look at what else is available on the market to see if you could get a better deal.
Research from comparison site RateCity for example, shows a multitude of home loans offer discounted rates to get new business through the door. As RateCity puts it, banks are using hot rates to lure in new business while loyal borrowers pay the price.
Which strategy is right for you?
Of course, interest rates aren’t the only factor that determines whether your home loan is right for you. Loan features can have a significant impact on the overall cost of your loan.
Nonetheless, with some home loan rates rising ahead of the RBA’s official cash rate, now’s the time to speak with your local Mortgage Choice broker to know if fixing is the right choice for you – or to understand if you have the best loan type for your unique financial circumstances.