When is the right time to fix your home loan interest rate?

As Australia’s economy continues its recovery, home loans and borrowers are likely to experience changes.

While many borrowers have gotten used to super low rates, things are starting to revert back to pre-pandemic ‘normal’ conditions. So, interest rates are slowly starting to rise.

This means it’s not a bad time to review your home loan and see if locking in a low rate may be a good move.

In this article, we’ll look at when the right time to fix your interest rate could be, the pros and cons of fixing, as well as your other options.

Is now a good time to fix my mortgage?

With interest rates likely to increase this year, it’s not a bad time to consider switching to a fixed interest rate.

While interest rates on fixed loans aren’t as low as they were last year, there are still some competitive deals on offer.

If you’d like to avoid seeing your interest rate rise before your eyes, switching to a fixed rate now – before rates rise further – could make sense.

In saying this, variable rates are unlikely to soar dramatically. For the sake of Australia’s economy, lenders need Aussies to be able to afford to borrow money. So, any increases will happen gradually.

Additionally, many Australians are actually ahead of their minimum mortgage repayment requirements. The low interest rates have inspired some borrowers to add funds to their offset accounts, make extra repayments or increase their monthly repayment amount, for example.

So, you may already have a sizable buffer when it comes to repaying your home loan. Data from the Australian Prudential Regulation Authority (APRA) indicates that the average borrower is 45 months ahead of their principal and interest home loan repayments.

Can you afford your variable home loan repayments if rates go up?

If you are unsure whether to fix your rate, another thing to consider is whether you will be able to handle a variable interest rate increase.

If you’ve borrowed too much in comparison to your income, even a marginal rate increase could prove to be challenging.

Here is how small interest rate increases can affect your monthly repayments:

As you can see, while a 0.5% interest rate increase may not seem substantial, it can really add up over time. In the above example, you’ll be required to pay about $115 extra each month or $1,380 per year. That’s almost $7,000 over 5 years!

To see if you could handle an interest rate increase of 1 or 2%, for example, enter your home loan details and adjusted interest rate into Aussie’s Mortgage Repayments Calculator. If your repayments will be more than you can afford, a fixed interest rate may be something to consider more seriously.

Don’t forget that home loans are more than just an interest rate – you have to consider fees as well.

Should I fix my home loan or go variable?

Deciding whether to opt for a fixed or variable interest rate can be difficult. Keep reading to learn about some of the pros and cons of each interest rate option:

Fixed rate home loan

• Stability: for borrowers who would rather see their repayments remain at the same amount each month, a fixed interest rate could be the smarter option. You’ll owe the same amount each month, reducing stress and making budgeting easier.
  
  
• Lock in a low rate: by fixing your interest rate, you may be able to keep the same low rate for up to 5 years. If interest rates continue to rise, this protects you.
  
  
• Won’t benefit from rate drops: if interest rates drop back down again before the end of your fixed term, you’ll be stuck with a less competitive rate.
  
  
• Difficult refinancing: refinancing a fixed rate mortgage will usually involve break fees since you are essentially violating the terms of your loan.
  
  
• Fewer loan features: fixed rate home loans generally have limited or restricted loan feature options (e.g. limited access to offset accounts and redraw facilities).
  
  
• No unlimited extra repayments: should you wish to make additional repayments, you’ll have to check your loan terms. Most lenders won’t allow fixed rate borrowers to make unlimited extra repayments on their loan.

Variable rate home loan

• Rate fluctuations: for better or for worse, variable rate home loans are subject to fluctuations in the market. While interest rates are low, your monthly repayments will be too. However, if interest rates rise, you can expect to have to make larger repayments.
  
  
• Easier refinancing: you won’t have to worry about break charges or any restrictions on refinancing a variable rate home loan.
  
  
• Loan features: it’s easier to get full access to loan features like redraw facilities and offset accounts with a variable rate loan.
  
  
• Unlimited extra repayments: there are typically no restrictions on making additional home loan repayments with a variable interest rate.
  
  
• Increased stress: the inconsistency of your repayments can make budgeting more difficult and put you at higher risk of mortgage stress.
  
  
• The lender is in control: while lenders are guided by the RBA cash rate decisions, they are also able to adjust interest rates independent of the RBA.

How long should I fix my home loan interest rate for?

The length of your fixed term should really depend on your goals and needs.

In general, you’ll get a lower interest rate if you fix your loan for 2 years compared to 5. However, a longer fixed term could be a better option if you prefer to just ‘set and forget’ your loan.

If you’re unsure about how long to fix your home loan interest rate, speak to your local Aussie Broker.

Still undecided? Consider splitting your loan

If you can’t make a clear-cut decision between a variable or fixed interest rate, why not have both?

A split loan is an option that allows you to fix a portion of your loan and have the rest charged a variable interest rate. It doesn’t have to be a 50:50 split – you could fix 80% of your loan and make 20% variable.

Whether you want to fix, split or stick with a variable interest rate, it’s worth chatting to your local Aussie Broker. Our experts can help you figure out if refinancing is worthwhile for you and give you an indication of your home loan options.

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