Should You Fix the Interest Rate On Your Home Loan?

Should You Fix the Interest Rate On Your Home Loan?

With the recent decrease in the cash rate, we’ve seen a flurry of lenders and banks reducing their fixed rates. Some going as low as 1.99%.

However, while rates are so low you may be tempted to lock your rate in right away but is a fixed rate right for you? When making any decision it’s advisable to have all the facts upfront, so we have summarised for you some of the benefits of a fixed rate and areas that you should be considering before locking in.

What is a fixed rate home loan?

A home loan with a fixed interest rate will have the same interest rate for a set period (generally 1-5 years). This also means your regular repayment amounts also stay the same for this set period. After the fixed rate period, your interest rate ‘rolls to’ a variable rate or you have the option of re-fixing for another set term.

What are the benefits of fixing your interest rate?

Makes budgeting easier.  Because your repayments remain the same during the fixed rate period, you know exactly how much your outlay to your home loan is going to be each month. With a variable rate loan, this can fluctuate depending on how your interest rate fluctuates.

Less features = Lower ongoing costs. Not all lenders offer a fully featured fixed rate home loan, this means you may not have features like redraw or an offset account. The upside to this is that you won’t be charged for additional features that you don’t have access to.

Points of consideration

  • Because your rate is ‘locked in’, it is set for that period, that means if interest rates go down you won’t benefit.
  • If you decide to switch your loan while still on your fixed rate or even sell your home, you will be charged what is known as a ‘break fee’. This is a fee some lenders charge customers who want to end their fixed rate before the fixed rate term stated in their loan contract has ended. The break fee is designed to compensate the lender for any loss of profit it may suffer as a result of you breaking your fixed rate.
  • Potential for less flexibility. This can be a benefit (as mentioned above) but depending on the lender it may also mean that you don’t have access to features like extra repayments, redraw facilities and/or an offset account.

Still can’t decide?

You can have your cake and eat it too with what some lenders called a ‘split loan’. This is where you split your loan amount into 2 loans. One portion is fixed and the other is on a variable rate. This structure gives you the flexibility to make extra repayments on the variable loan while maintaining the security of a fixed repayment on the other loan.

With all the noise in the market, it can be hard to stay across all the options available to you. That’s where speaking to a finance broker, like 8 Collective can help. We have access to over 40 lenders Australia wide and do all the hard work for you when finding you the best possible solution.

Book in a time to speak with one of our finance team today.

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