Find out the pros and cons of fixing your rate now and how the rate hikes affect your mortgage
19 July 2022|4 minute read
Home loan interest rates are on the rise, due to the official cash rate soaring to 1.35% in July. These Reserve Bank of Australia (RBA) rate hikes are unlikely to be the last this year, so it’s a good idea for home loan borrowers to get prepared.
One step that you could take to limit the impact of future rate rises is fixing your interest rate. In this article, we’ll look at the pros and cons of fixing your interest rate now.
New home loan borrowers have enjoyed almost 2 years of historically low interest rates, but this has come to an end.
The RBA lifted the cash rate from 0.10% to 0.35% in May, then to 0.85% in June, and now to 1.35% in July. This means that the cost of borrowing for banks has increased. Naturally, banks will pass on this cost to borrowers in the form of increased interest rates.
Increased interest rates will only affect borrowers with variable interest rates. These borrowers are likely to see their monthly repayment amount increase.
While higher interest rates aren’t ideal for borrowers, they can be good for those with high interest savings accounts.
Learn more about how the cash rate affects mortgages here.
A fixed rate home loan is a mortgage with an interest rate that stays the same for a specified period of time, usually between 1 and 5 years.
This means that for the duration of the fixed term period, your home loan repayments will remain the same – regardless of changes to the cash rate.
On the other hand, variable rate home loans have an interest rate that is subject to constant change. This means that variable rate repayments will often fluctuate each month.
An obvious advantage of fixed rate home loans is that your repayment amount will be the same every month.
If there are fluctuations in the cash rate and interest rates, your home loan will be unaffected – for better or for worse.
On the other hand, borrowers with a variable rate home loan will need to be prepared to experience higher repayments.
Something that variable rate borrowers should consider is whether they will be able to comfortably afford their home loan repayments if interest rates continue to rise.
Here is an example of how small interest rate increases can impact your monthly repayments:
|Loan amount||Interest rate increase||Annual repayment increase|
If you think that you may struggle to meet your home loan repayments if rates rise, it may be smart to look into fixed interest rates. If you can refinance to a fixed rate that you can afford, you can lock in this rate for a period of 1 to 5 years.
Whether you want a fixed rate or a variable rate, you can get an idea of what your monthly repayments will look like at a different rate with Aussie’s Mortgage Repayments Calculator.
Here are some of the potential pros of getting a fixed rate mortgage at the moment:
Here are some of the potential cons of getting a fixed rate mortgage at the moment:
Unfortunately, there’s no single answer that will make sense for everyone. Whether you fix your loan or go variable will depend on your personal financial situation and what is important to you.
Ultimately, borrowers should take the time to weigh up the pros and cons of each option.
Even though fixed rates are much higher than they were earlier in the pandemic, the security they afford may still be appealing to many borrowers.
On the other hand, a property investor might prefer to go with a variable loan due to the flexibility and features offered, for example.
If you’re unsure which direction to take, it could be worthwhile to speak with a financial advisor or learn more about your options with a mortgage broker.
Torn between a fixed and variable rate home loan? With a split rate loan, you don’t have to make a choice between one or the other.
This loan type allows you to have part of your loan charged interest at a variable rate, while the remaining portion is charged interest at a fixed rate. You don’t have to split your loan 50:50 – you could, for example, make 70% of your mortgage fixed, and 30% variable.
If your home loan is already fixed, or fixing your rate isn’t for you, there are other ways to help manage pressure on your mortgage.
These may include:
Our article on what to do when rising rates impact your repayments explains these suggestions in more detail.
There’s no one-size-fits-all solution when it comes to managing your home loan. However, Aussie’s Brokers can help you understand your situation and provide you with home loan options moving forward. Book a free appointment to learn more today.
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Find out how a rate rise will affect your mortgage with our Rate Rise Calculator.