So how do fixed-rate home loans work?
A fixed-rate home loan allows a borrower to lock in a fixed interest rate for a set period of time. Generally speaking anywhere from 1-5 years however in some rare cases lenders will offer fixed rate home loans up to 10 years.
During the fixed period, the rate of interest charged by a lender does not change. This allows you to budget more easily. This differs from a variable rate home loan. The reason for this is that variable rate home loan interest rates fluctuate in line with the official cash rate set by the Reserve Bank of Australia
Why would I want to fix now?
There are a number of reasons why a borrower might decide to fix their home loan interest rate. In times of economic uncertainty, fixing your home loan interest rate can give you peace of mind.
What are some of the benefits of fixing?
It’s a good way to keep your budget on track because you know what your home loan repayments will be during the fixed period. At present, we are seeing some of the lowest fixed rates in history, with many products starting with a 2, which suggests that the long-term outlook for interest rates is lower, for longer. Fixed rate home loans are so competitive right now that borrowers who refinance to a fixed rate home loan could significantly reduce their home loan repayments. Click here to view our home loan interest rate comparison tool to see some of the fixed rates on offer.
Are there downsides to fixing?
Yes, there are a few things to consider.
For example, fixed rate home loans are inflexible as they generally speaking have fewer features than a variable rate home loan. You probably won’t have access to an offset or redraw facility with a fixed rate home loan and you may be limited to the number of extra repayments you can make.
- Break costs
When you decide to fix your home loan interest rate, you are making a commitment to your lender during the fixed rate period. If you want to make changes to your loan and want to exit or ‘break’ the fixed rate product before the end of the period, it may come at a significant cost to you. Prior to entering into a fixed loan it is absolutely paramount you speak to your broker first to ensure you understand how break costs are calculated.
What if I want the best of both worlds?
If you want to enjoy the benefits of repayment certainty that a fixed rate home loan provides but you also want to be able to benefit from future interest rate reductions you can choose to split your home loan into a fixed portion and a variable portion.
You can chop this up as you wish, some borrowers fix half their loan, others do 80% fixed, 20% variable, it really depends on your financial situation and needs.
So what’s the right move for me right now?
As is always the case when it comes to your home loan, the best move is to speak to your broker as there is no single magic answer that meets all borrower’s needs and objectives. The lending landscape is changing daily in response to the COVID-19 pandemic and your needs are likely to change as this situation evolves. If you’re thinking about switching to a fixed rate home loan, or fixing part of your home loan you should have a conversation with your Mortgage Choice broker about the right options for you.