If you’re in the market to purchase a home, or if you’re seeking to refinance your existing home loan, you might be asking yourself if it’s worthwhile to fix the interest rate on your loan.
Given the current low variable rates available, consumers may well question the value of using a fixed-rate home loan, but there are several advantages to doing so.
A fixed-rate home loan locks your repayments at a set rate for a certain time period, usually either for one, three, or five years. When the fixed rate period ends, the home loan reverts to the standard variable rate, unless you choose to go into another fixed-rate period.
A fixed-rate loan provides security
The biggest advantage to a fixed-rate home loan is the certainty it provides when it comes to the repayments schedule. You know exactly how much will be coming out in your weekly, fortnightly or monthly payments for a set period of time.
This allows you to not only organise your finances much more effectively but is also ideal for people who are on a strict budget while taking into account ancillary costs such as moving expenses.
It also means you’ll be able to save for the proverbial rainy day, and you can also plan for any upcoming purchases that will stay easily within your budget.
Protection from sudden interest rate hikes
While we’re currently in a period of low interest rates which may drop further, another housing market boom or increase in wage growth will likely prompt a rise in the official cash rate at some point in the future. Lenders will then follow suit, increasing their variable rate loans. Having a fixed rate will protect you from any unexpected interest rate rises.
By fixing your rate when the financial environment is low, you can both take advantage of low interest rates and at the same time protect yourself.
Take advantage of all time low fixed rates
While variable rates are currently lower than we’ve ever seen, in some cases the fixed rate may be even lower. Alternatively you could get the best of both worlds and split your loan, making a portion of your loan on a low fixed rate and the other portion on a low variable rate. However, there are various factors to balance. It’s worth discussing your options with a lending specialist to get an understanding of the pros and cons to each.
Do your research
A fixed-rate home loan may provide you with certainty; however, there are occasions when committing to a fixed-rate may not be ideal.
Firstly, you’ll need to consider the market trends. If lenders are predicting an interest rate increase, they may price their fixed-rate loans above their variable rate loans in anticipation of the increase. Getting ahead of the trend may save you thousands over the life of your loan.
Secondly, fixed-rate loans have less flexibility and product offerings than their variable rate counterparts. For example, some banks will charge extra to have a redraw option, they may not offer an offset account facility, and may cap the amount of additional repayments you can make in any one year. You also likely won’t be able to make extra repayments over a certain amount on your loan.
In addition, fixed-rate loans will often have higher switching and exit fees, which can make it an expensive exercise to change once you’ve locked in your interest rate.
As ever, it pays to do some research and speak with a lending specialist to ensure you get the best product for your financial circumstances.