There are two rate types for home loans in Australia: fixed and variable rate home loans. Variable home loan rates can rise and fall due to the lender’s discretion, whereas fixed rates do not change during the “fixed” period, typically on a one to five year term.
Once the fixed period on the mortgage has ended, you will need to look at the revert rate, the variable interest rate that will eventually become your new rate after the fixed period. The revert rate could be higher or lower than your current fixed interest rate as it depends on the market conditions and your lender’s terms at the time. If you choose not to go on the revert rate for whatever reason, you can always go back to a fixed interest rate or refinance your home loan to a lower variable rate.
Though this can sound like an advantageous option, there are also important factors to consider with a fixed home loan.
What are the advantages and disadvantages of fixed home loan rates
The same repayments
If you are on a fixed rate home loan, your repayments won’t change over a the agreed period of time. This can give you certainty around your repayments each month and offer peace of mind.
A fixed rate home loan can be advantageous for those who have a strict budget, as it allows you to budget accordingly every month unlike that of a variable rate. This is generally an option for first home buyers who are still settling other upfront costs like moving and renovation expenses.
Avoid sudden rate spikes
The Reserve Bank of Australia could raise the official cash rate if the housing market is on a boom or employment is high, leading to lenders to also raise their costs. If you have a variable interest rate, you’ll be affected as the rate would be increased. However, having a fixed rate home loan means you will remain unaffected by the change – positive or negative.
RBA states the new record low cash rate will remain at 0.25% until labour markets move towards full employment and inflation is tracking to be within the target range of 2-3%. Read CoreLogic's full response to today's RBA Special Announcement: https://t.co/HrFBYGypTx— CoreLogic Australia (@corelogicau) March 19, 2020
There is less flexibility when it comes to a fixed rate mortgage. Depending on your lender, you might not be able to make extra repayments to your mortgage to lower the interest, and there may also be higher costs if you choose to leave and refinance.
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Offset accounts are rare
An offset account is a transaction account linked to your home loan that allows you to make deposits and withdrawals from your home loan, reducing the amount of interest charged after a period of time. Fixed rate loans with offset accounts are very rare in comparison to variable rate. If you’re looking to use an offset account for your home loan on a fixed rate home loan, it could take longer to find a lender with that benefit.
As mentioned above, if you decide to leave a fixed rate home loan before the end of the specified term, you may be charged with a break cost. The amount depends on the lender, but this could start from a few hundred dollars to potentially thousands.
How do I compare fixed home loan rates?
To compare fixed home loan rates, you can look at the following features
A low interest rate
The lower the rate, the higher savings will be. With fixed interest rates, borrowers tend to lock in a good rate before the market rates rise. It may be beneficial to also look at the lender’s variable rate and compare the two to see which one is the better option.
Any account fees
There are several fees associated with a fixed home loan, especially annual fees or ongoing account maintenance fees. A lower fixed interest rate may seem appealing, but could have higher fees which will cost you more in the long run, and vice versa.
Related: Should I be worried about Bank Fees?
Length of loan term
Fixed rate loans come in a variety of loan terms, from one to five year rates. Most loans have multiple loan terms with different rates for each. The shorter the loan period, the lower the interest rate would be, so one year terms are generally favourable as opposed to longer terms.
Why are fixed rate loans being lowered and how can it help?
Fixed rate home loans are now the lowest rates on the market following the coronavirus, financial forecasts and recent Reserve Bank of Australia (RBA) decisions. The RBA cut the cash rate in March 2020 and lenders followed suit to send the variable home loan rates falling for borrowers. However a couple of weeks later, they cut the cash rate again. After the second cut, some lenders didn’t lower their variable home loan rates, but instead cut their fixed rates.
CBA | “Reduce by 0.70% to an all-time low interest rate of 2.29% for 1, 2 and 3-year Fixed Rate home loan customers with Wealth Package, with no change to variable rate home loans” #ausmoney #onthemoneysbs— Ricardo Gonçalves (@BUSINESSricardo) March 19, 2020
There are a few reasons as to why the fixed rate loans are being lowered. Lenders have lowered their fixed rate loans to help borrowers afford a house and support the economy during the pandemic. To the bank’s advantage, lower fixed rates also bring in new potential customers. On a similar level, keeping the variable rate still drives profits to the banks as most customers are on a variable as opposed to a fixed interest home loan.
For those wanting to lock in a low rate, this could be the time to take advantage of RBA cuts and market conditions. Locking in a rate would give certainty in what repayments will be and guard against any potential rate hikes that could happen throughout the period.
Words by Joanne Ly
Is your current interest rate still competitive? Contact one of our mortgage brokers to compare your options and find a deal that suits you.