Should I fix my home loan interest rate?

Should I fix my home loan interest rate?

Buying a home is an important life event for everyone, and finding a suitable home loan plays a huge part in making it possible. However, what many people struggle with is deciding whether to fix the interest rate or not. There are pros and cons with both choices, and with a little understanding of how the two interest rates work, you can choose what suits your needs.

What’s a fixed-rate home loan?

Let’s begin by understanding what a fixed-rate loan is. This is a home loan where the interest rate is pre-set for a specified period; typically 1, 3 or 5 years. During this time, you’ll know exactly how much you need to repay every month, regardless of changes to the Reserve Bank’s official cash rate or any fluctuations in the international financial markets, which could affect variable interest rates.

However, you may have to accept certain limitations with a fixed rate home loan, like potentially having no access to an offset account, or having to pay fees for breaking or modifying the contract.

A fixed rate loan usually reverts to the lender’s variable rate at the end of the agreed-upon fixed period.

Understand the pros and cons of fixing your home loan

There are positives and negatives of choosing to go for a fixed rate. What matters is which home loan interest rate suits your needs.

Pros

  • With a fixed loan rate, you can plan your monthly budget much better, since you know the payment amount won’t change during the fixed period.
  • You are insulated against rising variable interest rates, so you don’t have to worry about your mortgage repayments increasing.

Cons

  • You won’t benefit from any drop in variable interest rates, so you might actually end up paying a higher rate.
  • If you wish to get out of your fixed home loan, you might have to pay costly break fees. This is a payment made to the lender for breaking out of the contract.
  • You might also not be able to make extra repayments without paying a break fee.

When is a good time to fix my home loan?

‘Should I fix my home loan now?’ is a question that comes to mind for most home loan borrowers and often, during the home loan payment journey.

How do you know when it’s a good time to fix the loan? The answer will depend on your personal financial situation, though there are a few scenarios where fixing you loan could be worth considering

For example, if you believe that rates will rise in the future and current fixed rates are lower than usual, you could consider fixing. On the other hand, if you think variable interest rates have reached their peak and are going to start falling, you may prefer to avoid fixed rates.

When interest rates are rising, it could be a suitable time to fix. Do your homework and calculate how high variable rates have to go before you begin to save with fixed-rate home loans.

When finalising your mortgage, take time out to work out the difference between fixed and variable rates. Compare home loans online before making the decision.

When should you not fix your home loan?

A fixed-rate home loan could offer you numerous advantages over a variable rate home loan. But certain situations may not be conducive to fixing your home loan, depending on your plans for the future.

Fixing your loan may not be a suitable choice under circumstances such as: 

  • You plan to make large extra repayments on your loan.
  • You intend to sell your property during the fixed term.
  • You wish to refinance your home loan within the fixed term.
  • You plan to renovate your home or build a new one within the fixed period.
  • You might not wish to be locked in with a particular lender or loan product for a fixed period.

Whether you’re buying your first home or seeking to refinance your current mortgage, you need to do your homework before finalising a home loan. Read the product disclosure statement (PDS) thoroughly to familiarise yourself with all the terms and conditions before signing up.

Are you looking to fix your home loan? Look for a great fixed home loan with the RateCity home loan comparison tool. 

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Learn more about home loans

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

What is a split home loan?

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan. 

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment.