Should you choose a fixed rate home loan?
What is a fixed rate home loan?
A fixed interest rate home loan is the type of home loan where you lock in (or ‘fix’) your interest rate for a set period of time (usually between one and five years). One of the main advantages of this is cash-flow certainty.
By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future. This factor often makes fixed rate home loans very popular for investors over the first two-three years of owning a property.
Fixed rate period
If you don’t like the uncertainty of a variable rate home loan, a fixed rate loan is a great option to give you peace of mind.
The rate is fixed but your options aren’t. Choose either a 1, 2 or 3 year term and consider the ways you can get the best out of our low fixed rates.
We also offer the option for weekly, fortnightly or monthly repayments, with $0 application and ongoing fees.
Rate locking
At loans.com.au we also offer optional rate locking.
Rate locking is available when obtaining a fixed rate home loan, and can guarantee your fixed interest rate for your chosen fixed rate term and protect you against rate rises for a period of time while your loan settles. When you take out a fixed rate loan, you normally receive the interest rate that applies on the day your home loan is settled. This could be different to the rate on the day you first applied.
Rate lock protects you as the borrower from any interest rate rises for a period of time from when you apply for the loan, to when your loan settles. Before settlement, a home loan interest rate could rise, putting you out of pocket and placing an added burden on your budget, however, opting to lock in your fixed rate will protect you from this risk.
Fixed interest rate home loan pros and cons
What are the advantages of fixed interest rates?
The primary benefit of taking out a fixed-rate home loan is the greater sense of financial certainty it provides.
Under this arrangement, the interest on your mortgage is locked into the rate that you agreed to for a period of time e.g. 3 years, meaning that even if your lender increases their interest rates during that time, your repayments will be unaffected.
Essentially, the biggest benefit of a fixed home loan is having predictable payments each month. This can be helpful, particularly for first homeowners who are adjusting to making regular repayments.
Some fixed rate products will allow a limited amount of additional repayments to be made without incurring a penalty, but if you plan to make additional repayments to your fixed rate loan, it is important to understand what this limit is first.
What are the disadvantages of fixed interest rates?
The certainty of a fixed home loan allows you to set an accurate budget. However, the inflexible nature of a fixed home loan is both a blessing and a curse.
It provides you with a strong sense of certainty, even when the economy is going through tough times, but it also offers little in the way of choice and freedom.
The downside to your rate being locked in for a length of time occurs when interest rates are dropping around you, meaning that if you were on a variable rate you would be paying less interest than what you are on a loan that was fixed at a higher rate.
The penalties for making additional repayments beyond the allowed limit can be harsh if you unknowingly make more repayments than is allowed. Fixed-rate mortgages typically do not offer features like a redraw facility or offset sub-accounts.
In addition, if you make adjustments to your loan or sell your home within your fixed term, you may also have to pay expensive break fees, often to the tune of thousands of dollars.
Pros
- Peace of mind and certainty about your monthly repayments
- Allows for better monthly budgeting
- Your mortgage repayments do not rise if interest rates go up
Cons
- Less flexibility for additional repayments
- Home loan payments don't fall if interest rates go down
So, is now a good time to fix your interest rate?
Before we get out the crystal ball and try to forecast the future of interest rates, let’s consider something that should be more predictable and more important – your personal circumstances.
Ultimately, you need to decide if it’s wise for you to choose fixed or variable based on your own short-term and long-term plans.
When is fixing a bad idea?
In return for the security of fixed rate loan, you’ll lose some flexibility and will face exit fees if you make changes to your loan or extra repayments during the fixed rate period.
That means the key question to ask is how much flexibility you’ll need over the fixed-rate period you are considering.
It could be a bad idea to fix your loan if, during the fixed term:
- You want to make large extra repayments on your loan
- You want to sell your property
- You want to refinance your home loan
Before you ask if now is a good time to fix, remember to ask: “is now a good time for me to fix.”
Now, let’s look in the cup and read those economic tea leaves.
Are home loan interest rates going up?
Predicting home loan interest rates has always been complicated but in the last couple of years, it has become even more difficult.
The RBA can always rise or lower the cash rate, which will in turn impact lenders interest rates.
Fixing your interest rate means if the RBA rises its cash rate, your rate will be secured for the fixed term, meaning it won’t go up unexpectedly.
Are fixed interest rates cheap?
The good news is that right now, lenders are offering some excellent fixed interest rates. At loans.com.au, we offer some of the most competitive fixed rates in the market.
For a price lower than most other lenders’ variable rates, you get the confidence of knowing your repayments are locked in for the next one to three years!
What if I can’t decide on a fixed rate?
If you can’t decide between a fixed or a variable rate, there is always a third option.
That option is a split loan, where part of the loan is fixed and the remainder is left on a variable rate. For example, you might fix 40 percent of the loan, and leave 60 percent variable.
That way if rates rise, your repayment will only increase on the variable part, but won’t change on the fixed part. Talk about hedging your bets!
What are the benefits of a split loan?
A split loan refers to splitting your home loan amount, where one split is charged at a variable rate and the other is charged at a fixed rate. You can split your loan however you please, should your lender allow it, so 60% could be variable and the remaining 40% fixed, for example.
In this example, if you had a $600,000 mortgage, $360,000 would be charged at a variable rate, and the remaining $240,000 charged at a fixed rate.
The benefits of a split loan are it affords you the benefits of both variable and fixed-rate loans. It provides the security a fixed-rate loan gives you through cashflow certainty with your repayments locked in, while also giving you the flexibility of a variable rate loan. A variable rate loan allows you to make additional repayments, use a redraw facility, and take advantage should interest rates fall. You can also split according to your circumstances, giving you even more flexibility.
A variable-rate also allows you to make use of an offset sub-account. An offset sub-account is a transaction account linked to your home loan, where the money in it is offset against your home loan amount when interest is calculated. This reduces the amount of interest charged over the life of the loan, reducing the length of the loan and potentially saving you thousands.
For example, if you had a $500,000 home loan and had $50,000 in your offset sub-account, interest would only be charged on $450,000 of your loan for the period of time the funds are in the offset. Many people have their pay deposited directly into their offset sub-account, with the majority of home loan rates now superior to savings account rates.
When choosing between a fixed rate, variable or split rate loan, it's important to keep in mind your goals and individual financial situation.
For more information on what type of loan would suit you best, talk to one of our lending specialists or find out if you qualify today.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
