The Reserve Bank of Australia has kept the official cash rate at a record low of 1.5% since August 2016. It’s been great news for home owners, who’ve been able to take advantage of record low home loan rates. In fact, we’ve haven’t seen variable rates this low since the late 1950s.
However, the Reserve Bank has cautioned that the next interest rate move is more likely to be up than down. This can make it worth thinking about locking in your home loan rate. The important thing is to weigh up the pros and cons of a fixed versus variable rate.
On the plus side – protection from rate hikes
Fixing your home loan rate provides protection against possible future rate hikes – at least for the fixed term you select. And because your repayments don’t change even if market rates do, your home loan repayments are easier to budget for.
On the downside – fixing can mean fewer features
A potential drawback of fixed rate home loans is that they can have fewer features than a variable rate loan.
In particular, some (though not all) fixed rate loans don’t permit extra repayments. Among those that do, a limit may be imposed on the additional repayments you can make.
On top of this, other features that could be useful for you like redraw or an offset account, may be unavailable with a fixed rate loan.
It can be expensive to refinance
You may be happy with your loan today but none of us know what lies around the corner, and if, for whatever reason, you want to move out of a fixed rate loan early, you could face “break” costs.
Exactly how much you may pay depends on several factors including how market rates have moved since you first fixed – so this cost can be hard to predict upfront. Nonetheless, it’s good to be aware that switching out of a fixed rate loan prematurely could potentially cost you thousands of dollars.
By contrast, if you want to refinance a variable rate loan, you shouldn’t have to budget for exit fees, which have been banned on new loans since 2011.
Is there a middle ground?
Yes! There is a solution that can combine the benefits of both fixed and variable rate home loans. The answer can lie in splitting your home loan. That’s when part of your home loan has a fixed interest rate, while the reminder has a variable interest rate.
This type of loan can provide an element of protection against possible rate hikes – but you’ll also benefit if rates drop. And you should still be able to make extra payments or take advantage of an offset account on the variable rate component of your loan. It could be the win-win you’ve been looking for.
Unsure whether to go fixed or variable? Talk to your Aussie Broker today to have your home loan reviewed by an expert.
You may also be interested in Dear John – what do I need to know about fixed interest rates?, Dear John – should I get a fixed or variable interest rate? and Dear John – what happens when my home loan’s fixed term ends?