Fixed home loan rates are the lowest that they have ever been. So if you are seeking greater financial certainty and want to take the stress out of waiting for the Reserve Bank of Australia to make its monthly decision, then now may be the time to fix your home loan.
Interest Rate Predictions
Interest rates movements are extremely difficult to predict due to changes in economic and political situations worldwide. In fact, even the most experienced economists do notalways get it right.
For the average home loan holder, trying to second-guess interest rate movements can be a nightmare. Concern over rate rises and financial stress can weigh heavy on your mind, especially when the Reserve Bank of Australia (RBA) announce their official cash rate decision. Plus, with no legislation to govern lenders, you are never really guaranteed that they will pass on rate cuts, or will not make independent rate rises.
The Risk Associated with Fixing Your Home Loan
There is an element of risk with every financial decision that you make, but you can reduce these risks if you do your research before making any move. So before you lock in a fixed rate on your home loan, you need to look critically at your personal and financial circumstances.
A fixed rate home loan locks your interest rate for the term you have chosen. So lets say you fix for 12-months at 4 percent. This decision means that you know what you will be paying monthly on your home loan for 12-months without you having to worry about rate rises or arguing with your partner about finances. But, if the variable rate drops even further than it already is, which some economists are predicting, then you may be locked in at a higher rate than the variable, which means that you may be paying more than you need to.
Plus, before you make any move you need to look at the costs, as switching your home loan from a variable to a fixed rate means you are refinancing. When you refinance your home loan, you are taking out a new home loan and this means that you will have to pay the fees and charges associated with making the switch.
It is also important to note that the fixed rate is over the term of the loan, which can be between 1 and 5-years. So while your rate sounds low, if you stretched this out over say 25 to 30-years you may find that its not as low as you first thought.
The only way to know whether you can save by switching from a variable to a fixed rate is to do the math. Do not just rely on your lender and their figures. Instead, do your calculations and weigh-up what option is best for you.
If you think that you will want to move in the near future, or that you will want to pay lump sums off your home loan as the finances become available, then do not fix your home loan. If, however, you want greater interest rate certainty due to tighter finances, and you would like to keep your home loan repayments the same, then opt for a fixed rate home loan.
Fixing All or Part of Your Home Loan
Another option is to fix a portion of your home loan and to leave the rest variable, theoretically giving you the best of both worlds. This option gives you some protection against rate rises, but will also give you greater flexibility. Therefore, you can pay more off the variable portion of your home loan and have access to features such as a redraw and offset account.
With fixed rate home loans having terms of up to 5-years and interest rates of below 4.5 percent, many home loan holders are looking at fixing long term. This decision may see these home loan holders secure a lower rate for longer, as many feel that it is unlikely that variable rates will remain as low as they are for longer than 12 to 18-months.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!