Is now the time to fix your interest rate before rates rise again?

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.

How has the cash rate rise impacted home loan interest rates?

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.

What is a fixed rate home loan?

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.

Will you be able to afford your loan repayments if variable rates rise?

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:

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.

What are the benefits of fixing your home loan interest rate?

Here are some of the potential pros of getting a fixed rate mortgage at the moment:

1. Repayment stability: a fixed rate mortgage offers a level of certainty to borrowers over the fixed period. During this time frame (typically between 1 and 5 years), your rate will remain the same and in turn, so will your mortgage repayments
   
   
2. Lock in a competitive rate: by refinancing to a fixed interest rate, you may be able to lock in a competitive interest rate for the next couple of years
   
   
3. No need to stress about rate rises: while you have a fixed rate, you can avoid the stress of seeing the cash rate and interest rates rise since this won’t affect you during the fixed rate period
   
   
4. Budgeting is easier: since you’ll know exactly how much you need to repay each month, managing your budget will be simpler.

What are the drawbacks of fixing your home loan interest rate?

Here are some of the potential cons of getting a fixed rate mortgage at the moment:

1. Uncertainty over cash rate changes: while experts are predicting a series of cash rate increases over the next few months, this isn't guaranteed. So it is possible that you could lock yourself into a fixed rate that ends up being uncompetitive compared to variable rates
   
   
2. Less loan flexibility: most fixed rate home loans don’t allow for unlimited extra repayments, 100% offset accounts and may charge break fees if you refinance before the end of the fixed term
   
   
3. Pay up if you want out: if you want to refinance before your fixed rate expires, or you’d like to repay your loan early, you are likely to be charged break costs to cover the lender’s financial loss
   
   
4. Fixed interest rates are higher now: some experts have said that the best time to fix your rate has passed, with fixed rates now much higher than they were a year ago.¹ Rates are particularly high for investment loans
   
   
5. Rate drops won’t affect you: while it’s unlikely that we’ll see interest rates decline over the next couple of years, fixed rate borrowers won’t benefit from rate drops if they occur.

To fix or not to fix – what is the right move?

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.

Can you get a split rate home loan?

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.

Other ways to deal with rising interest rates and repayments

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:

• Consolidating debt
  
  
• Making use of a redraw facility or an offset account
  
  
• Refinancing to a more suitable, competitive home loan
  
  
• Finding a home loan with lower fees (or no fees)
  
  
• Reviewing your budget and spending habits
  
  
• Speaking to a financial advisor for financial advice.

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.

References

¹Strategies to help mortgage holders handle rate rises, AFR

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