Following recent cash rate cuts from the Reserve Bank of Australia (RBA), many banks have slashed their home loan interest rates to new lows.
Some borrowers may want to lock in these low rates with a fixed rate home loan, but it’s important to be aware of the potential risks and rewards involved before applying.
Pros of fixed rate home loans
The main benefit of a fixed rate home loan is that it keeps your home loan repayments the same for a pre-set length of time, for simpler budgeting. If interest rates rise, borrowers on variable rate home loans will have to pay more in interest charges, while borrowers with fixed rate loans keep paying the same amount, effectively saving some money.
For example, if you were to take out a fixed rate home loan from BOQ, you could lock in an interest rate as low as 2.99% p.a. (comparison rate 4.09% p.a.) for a term of three years. Assuming a mortgage of $500,000 for example, your repayments would cost $2,105 per month for three years, regardless of whether rates rise.
Features of fixed rate home loans
A low interest rate isn’t the only thing to look for when comparing fixed rate home loans. A mortgage with features and benefits that suit your financial situation can make a big difference.
For example, the BOQ three-year fixed rate home loan lets you make up to $5,000 in extra repayments per year, which can help to lower your loan principal, shrink your interest charges, and pay off your debt that little bit sooner.
However, this mortgage offer is only available to owner occupiers, so investors may want to look further afield.
Cons of fixed rate home loans
The main risk of a fixed rate home loan is related to its main benefit – if variable rates change, you’ll keep paying the same fixed rate, even if a fixed rate is higher. For example, if the RBA cuts the cash rate again, or if your lender reduced its variable rates for other reasons, borrowers with fixed-rate home loans would miss out on the interest savings from the lower variable rate.
It’s also important to keep in mind that once the fixed term expires, your home loan will revert to your lender’s standard variable rate. If this rate has risen significantly during the fixed term, you could be in for a shock when the cost of your repayments jumps overnight.