Interest rate changes are never easy to predict. But, now that banks are making moves that are independent of the Reserve, it is becoming even harder. This is prompting borrowers to consider fixing their home loan to remove the uncertainty and lock in their loan repayments for a certain period of time.
Economically speaking, Australia is ambling after the mining boom, and this places pressure on the Reserve to keep interest on hold. Although, since 2012, banks have moved rates up independent of the Reserve and introduced varying rates for investors. So, fixing all or part of your mortgage enables you to maintain a level of certainty as the economy strengthens. Before making any financial move though always consider the costs, control and timing.
By fixing your home loan, you are reducing financial stress, as your home loan repayments will not change during the fixed period. Also, you will also reduce any financial risk.
In spite of this, risk reduction comes at a cost. First of all, there are the fees associated with switching home loans, which can be thousands. Secondly, fixed rates are usually higher than variable rates. Consequently, if variable rates drop, you will be paying more.
Changes in the daily interest rate directly affect your largest repayment, your mortgage, which can affect your quality of life. Consequently, the more you pay on your mortgage, the less residual income you will have. Thus, by taking out a fixed home loan, you are exerting control over your home loan repayments.
Remaining variable, on the other hand, reduces your financial control over your mortgage repayments. For example, in the 12-months from October 2009 to 2010 variable interest rates rose by almost 2%. At the time, experts said the rises would be unlikely, but, nevertheless, they occurred.
Over this time, many home loan holders fixed their repayments because they wanted reassurances that their costs would not increase. Some of those who weathered the variable storm struggled and ended up losing their home and investments.
In order to time when you fix your home loan right, you need to conduct thorough market research. Much like the property market, fix when you can get the lowest possible fixed rate. Ideally, fix your rate just before variable rates look set to rise.
Of course, it is also important to consider your long-term plans. If you are looking to stay in your home for 10 or more years, then consider fixing. If not, then stay variable. You can also consider fixing a portion of your home loan and leaving the rest variable.