If you’re buying a property or considering refinancing your home loan in 2018, you may be asking yourself whether to fix your interest rate or not. Many people think about switching to a fixed interest rate mortgage when interest rates are low, in the belief that it will insulate them from future interest rate rises. In some instances, this approach could prove worthwhile, but not always and perhaps not for your situation. In this article, we explore the pros and cons of fixed, variable and split rate home loans to help you make an informed decision in 2018.
Are interest rates at their lowest and will they go up?
The official cash rate, as set by the Reserve Bank of Australia (RBA), is what traditionally determines the base rate lenders use to set their home or investment loan interest rates. It has been at a historic low of 1.5 percent since August 2016 and many experts are predicting it to remain steady throughout 2018. Tim Lawless, the head of research at property data analytics group CoreLogic, said the RBA would likely keep interest rates on hold during 2018, with an interest rate drop unlikely.
At this point, it would seem interest rates are indeed at their lowest. So, does this mean a fixed rate product would be a better option than a variable home loan? It could be, but not necessarily!
Pros and cons of fixed interest rates
With a fixed rate home loan, you can lock your interest rate in for a set period (usually 1 to 5 years). The advantages are that you can anticipate exactly what your repayments will be, and budget accordingly. Refinancing to a fixed rate mortgage may also be worthwhile if you are on a tight budget and need certainty about the cost of your repayments. You may pay a bit more in interest in the long run, but it could be worth it for the peace of mind.
The disadvantages of fixing your home loan? Fixed rate loans usually, but not always, have a higher interest rate and cost more than variable rate home loans. So, unless interest rates go up beyond what you’re paying at your fixed rate during your fixed period, you won’t make any savings compared to a variable rate loan. If there are interest rate drops, you won’t get the additional savings as you would if you had a variable rate loan.
There may also be limitations on making extra repayments on a fixed rate loan. In some instances, you may still be able to make extra repayments to pay the loan down quicker, but they may be capped at a low amount or there could be fees involved. Sometimes, redraw facilities may not be permitted on fixed-rate loans, and there could be break fees if you refinance or pay off the loan within the fixed rate period.
Pros and cons of variable interest rates
Variable rate home loans usually have slightly lower interest rates than fixed rate home loans (but again, not always – it pays to ask us to shop around). If interest rates fall, your rate will usually fall too, as they tend to move with changes to market interest rates. Often, you can make extra repayments with variable rate home loans, allowing you to pay down your mortgage faster and potentially save money on interest. You can also access a range of handy features with variable loans, such as offset accounts or redraw facilities.
The disadvantage of variable rate home loans is that if interest rates rise, yours will too – but as Tim Lawless from CoreLogic says, that’s unlikely to happen in 2018. Budgeting can also be trickier, as your repayments will fluctuate if interest rates do change.
Another option – split your home loan
If you want to hedge your bets, you could consider a split rate mortgage. This is where you fix part of the home loan, while the rest is variable. In this way, you can mitigate some of the risks of interest rate rises while benefiting from useful features and extra repayment options.
Making a decision
“Should I switch to a fixed rate home loan?” is one of the most common questions we always encounter. It all comes down to your personal financial circumstances and what works for you – it’s not just about beating interest rate rises. If you’ve had the same home loan for a while or your fixed term is coming to an end, refinancing to a different loan product or lender may be worthwhile in any case. Speak to a mortgage broker to be able to find you a better interest rate, or different loan features that could help you save money.