Is it time to fix your home loan?

It’s the age-old question people love to ask: is now the best time to fix your home loan?

With cash rate at a historic low of 1 per cent, the question of whether to fix or not has become more prevalent than ever.

In the last four weeks, RateCity.com.au’s data team has seen around 50 lenders slash fixed rates, including all four big banks, and big-name lenders such as Macquarie Bank, St George, Bank of Melbourne and Bendigo Bank.

The big four banks are all now offering 2- and 3-year fixed rates for less than their variable rates.

Why? The banks have one eye on the possibility of one, if not two more RBA rate cuts. They also know fixed rates are a great way to get new business in the door – and keep them on their books for up to five years. With some low-cost lenders now offering rates that start with a 2 – it’s a sure-fire way to grab someone’s attention.

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So, is now the time to fix?

The cash rate is at record lows so now wouldn’t be the worst time to fix, but there’s a lot of speculation that the RBA will cut again – potentially even twice – so it’s a difficult decision that really does depend on your personal finances, and personality.

If you like the idea of knowing exactly how much your mortgage repayments will be every month, then fixing could be a good option for you.

However, if you absolutely hate the idea of missing out on a rate cut, even if you’re getting a good deal, then maybe you’re better off on variable. Variable rate products typically come with a more flexibility as well. You’re not locked in to a fixed term contract which gives you the ability to refinance more easily when you’re unhappy.

Alternatively, if you like idea of not having to worry about what your bank, or the RBA is going to do for the next few years then you might want to find a competitive rate that you know you will be happy with for the fixed term.

If you do decide you want to fix, it is worth shopping around for a decent rate but there’s a few other potential curve balls you want to be aware of:

1) Flexibility – most fixed rate loans don’t have an offset account and will only let you make limited extra repayments. Find out if your new fixed loan offers either of these things and make sure this is not going to work against you.

2)The fixed term – Work out how long you want to fix for and check the revert rate. Some fixed rate loans can revert to a much higher ongoing variable rate which will see you worst off in the long run. When you settle on a fixed rate loan, work out a plan for when it comes to an end. Some 1-year fixed rates, for example, can be more trouble than they’re worth if they revert to a high variable rate just 12 months later and you choose not to fix your loan again.

3) Break costs – Understand this is a contract that will cost you a pretty penny to break. If you decide to break that contract early, you could be liable for any costs your bank incurs as a result. Break fees can run into the thousands of dollars. If you are thinking about potentially selling the property or paying down a significant chunk of your debt, then fixing might not be a good option for you.

4)Split loans – If you’re undecided, consider a spilt loan. A split loan is a good way to have a foot in each camp. In this scenario the fixed part of the loan will be immune to any rate hikes, but if rates go down, you’ll see the savings in the variable portion of the loan. This also offers more flexibility as it’s often possible to make uncapped extra repayments and/or an offset account for the variable portion of your home loan.

If I want to fix my rate, should I fix now?

If you fix your rate now, there is a chance you could miss out on one, potentially two more RBA rate cuts. But that’s only if your bank passes on the rate cut to their variable customers.

On the flip side if you fix, you’ll be protecting yourself from any rate hikes from the RBA or independent ones from your own bank that happen over your fixed term.

People spend years trying to game it and often still get it wrong so it might be worth putting the crystal ball aside and try and make a decision that’s right for you and your finances. With any major financial decision, it’s often worth seeking personal advice. An objective view might be just what you need.

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