Should I fix my home loan rate or is it too late? – This question at the time of writing, (July 2022) is on the minds of all borrowers, and it is also the most difficult one to answer for many reasons. I will cover this below in detail to assist you in making any decisions to fix your home loan or remain on variable. This applies whether you have a home loan or are applying for a home loan.
Firstly, let’s cover the differences between the 2 types of loans and we will look at the pros and cons of fixed rate loans:
Fixed rate Home Loan = The home loan interest rate is on a defined rate for the period selected, being usually 1,2,3,4 or 5 years and can be longer with some lenders. This creates stability in the repayments for the period chosen.
Variable Rate Home Loan = Flexibility of extra repayments but you are at the mercy of rate rises (but also benefit from any rate decreases) in the future.
Fixed rate Pros:
- Stability: You will have a set rate for the period selected – allowing you to budget for your loan repayments, therefore eliminating the stress of rising rates over the short term.
- Possible Benefits: If variable rates continue to rise, it may put you in a position where your fixed rate may be lower than the variable rates of the future – the caveat here, is that it is only a band-aid fix, as a normal loan term is 25-30 years and you are only protected for a short time – also, variable rates have a long way to go to catch up to the fixed rates of today.
Fixed rate Cons:
- Limited Repayments: These loans are generally restricted regarding extra repayments, this means that if you were to receive a lump sum (Inheritance, sell a car, etc), you may not be able to put all of your money against the home loan to save money on interest.
- Higher Rates: The variable rates as they sit today, are much cheaper than the fixed rates. On average around 2% difference – at the time of writing this.
- No Flexibility: If the variable rates do start going down and you are still fixed, you will not be able to revert the loan to a variable rate loan without paying fees – even with your current lender.
- Refinancing is also restricted: The ability to refinance to a lower rate during your fixed term would require you to also break the fixed rate contract with your lender – There are usually substantial fees to be paid to the lender to break a fixed rate loan.
- Redraw not permitted: Be aware that a lot of lenders nowadays will not allow redraw of any advance payments (Extra funds you have paid off the home loan above the minimum) until your fixed rate expires (A lot of people get caught out on this one)
- No Offset accounts: In general, there are very few lenders that will allow you to offset your fixed rate loan. We know of 2 lenders who will do this and considering we have dozens of lenders on our panel, it shows how rare an option it is.
What does it all mean? and should you fix or not fix?
Basically, it comes down to a few things. Firstly, and most importantly we need to try to see what is happening with each client over the time period that they are considering fixing their loan.
It is also important to note that the end decision to fix or not should only rest with you, not anyone else. The importance of this, is based on the fact that no one really can predict the market, and our job is to really open up the understanding of what the differences in the loan product could mean
for you, and then let you decide with no pressure – what product is going to be best for you.
If the decision to fix your rate is made, you will need to live by that choice for the period chosen. So, it is important to have professional mortgage guidance to assist you in making your decisions, but to have the final say yourself. Questions should be asked that will open up your thinking before locking in and that will allow you to make a more informed decision.
Some things to consider:
- If you are thinking of selling, but know of an inheritance or lump sum coming your way or have the ability to pay large sums on to the loan, then splitting the loan with a fixed and variable portion may make more sense. This will not block you from the benefits of adding money to your loan account and will also allow for flexibility in respect of redrawing surplus funds but also provide some stability via the fixed rate portion.
- If the variable rates keep increasing, could your affordability be affected to the point where you can’t manage the repayments on the loan and therefore risk losing your property? Do you think the variable will get that high? In this situation you might fix the loan just to know that you can manage and not run the risk of not being able to afford the loan.
- You can also fix your loan with your current lender at any time if you are on a variable loan. There are very few lenders who do not have the option of fixing. Believe it or not, there are a few loans out there where a fixed rate is not allowed. Refinancing your loan may well be a better option too, as a lower rate elsewhere will be a further benefit and should be explored before locking in with any lender, even your current one.
- Rate locking a loan (Guaranteeing the rate of the day of application) will attract fees. Some lenders have a set fee ($395 for example, but most lenders will charge a percentage of the loan – usually around the 0.15% mark – So a loan of $500,000 X 0.15% = a fee of $750.
- The most important thing to consider in today’s rising interest rate climate, is the difference between the variable rate and the fixed rate you are considering. The variable rates are nearly 2% lower than the 3-year fixed rates of today.
If you were to fix your loan today, you will immediately be paying the higher rate. This also means that you would need to see 8 standard reserve bank increases @0.25% each, just to be on par with the new fixed rate you started on. It is worth considering if you think that the interest rates will increase to that level, but more importantly, how soon that would happen.
In other words, are you going to save money by being on the variable and making savings up until the point where it reaches the current fixed rate prices?
In a nutshell, making the savings on the variable rate will be attractive to some people, others may just want the security of knowing they have a set payment amount over the short term and be willing to take the fixed rate option.
There are other considerations to consider also because everyone’s circumstances are different. The information above is here to go over the basics. Having a discussion with a qualified broker will be your first step to breaking it down further and helping you to decide what works best for you.
Please feel free to contact us here at Illawarra Mortgage Brokers to discuss your own personal circumstances. We hope we can provide some insight for you in what is a testing time for anyone with a home loan. All the best.
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