The mere mention of the words ‘interest rate hikes’ send many homeowners into a spin as they debate the long-term financial benefits of fixing their rate versus riding out the variable rollercoaster. So why should you fix your home loan rate and when is the right time to lock it in?
If you’re in the market for a home loan and are feeling nervous about the prospect of interest rate hikes, it may be worth considering a fixed-rate home loan. The benefits of fixing include; your monthly repayments remain steady so you can more easily budget for a home loan, and should interest rate hikes occur during your fixed period you will continue to repay the lower amount.
We typically advocate at RateCity that a good window to fix your home loan rate is when fixed rates are less than 1 percent higher than standard variable rates. However, if you can find a fixed rate below the standard variable rate, then fixing becomes a viable option (if the loan fits).
But to get the best value out of your fixed home loan you must remember to compare deals before signing up, which you can do online at RateCity.
The pitfalls of fixing
While fixing a home loan may offer protection from interest rate hikes, on the flip side, if banks drop their variable rates, existing fixed-rate customers will miss out on the reprieve. Fixed rates can often be more restrictive than variable options too – with payment flexibility and freedom just two of the major features of variable loans that fixed customers typically forego.
While fixed-rates often appear cheaper upfront, they often revert to higher interest rates following the fixed period. So unless the borrower refinances to a reduced rate following the honeymoon period, fixed home loans can be a more expensive long-term term option.
Take, for example, a $300,000 home loan fixed for three years at a rate of 5.94 percent (reverting to 7.40 percent following the fixed period) verses a variable rate at 6.27 percent. An initial saving of 33 basis points might be tempting, until you realise that the total interest paid over 30 years is over $38,000 more for the fixed rate than the variable rate option (assuming variable rates remain steady).
Another sound option for those wary of interest rate hikes is a 50:50 split between variable and fixed – that way you’ll get the best of both worlds.
Do you own comparison to determine whether a fixed or variable rate home loan would better suit your needs? You can calculate the difference for both loan types, as well as split, by using the home loan repayment calculator.