See whether a fixed or variable interest rate is right for you
23 March 2022|4 minute read
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.
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.
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:
|Home loan amount||Loan term||Interest rate||Monthly repayment|
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.
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:
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.
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.
Learn more about fixed rate home loans and the benefits and drawbacks in this helpful guide.
Find out how splitting your loan could help you make the most of a fixed and variable interest rate.