April 4, 2017
With the Reserve Bank of Australia (RBA) making 12 rate cuts since November 2011, many Australians believe there’s more coming. However, lenders are now making independent rate rises, and this is encouraging some borrowers to fix their rates. This change is confusing many borrowers, and many don’t know whether to fix their home loan or not. So, let’s look at the highs and lows of fixing to determine if it’s the right option for you.
When you fix your home loan, you lock in a rate for a fixed term. The term is usually for 12-months to 5-years. In today’s market, fixed and variable rates are at similar rates. Of course, this depends on whether you’re seeking to buy a home to reside in or as an investment. Investment loans now attract a higher rate.
The highs of fixing – There are many reasons why you should fix your home loan. These are as follows:
- Locking in a low-interest rate now keeps your rate at the lowest ever seen.
- Rate locking protects you from future rate hikes.
- Fixing gives you peace-of-mind and reduces financial stress.
- A fixed loan provides you with budgeting assurance.
Financial experts suggest that over the next 5-years home loan interest rates will move back up to around 7 percent. For example, a home loan for $350,000 at 4.09 percent costs $1,690. Nevertheless, if rates rise to 7.74 percent, then this loan repayment increases to $2,506 per month or $816 more. Consequently, if you’re currently feel that your funds are stretched, then fixing is a viable option.
The lows of fixing – Before fixing your home loan, you need to consider your future plans. Fixing your home loan limits your flexibility, for instance:
- You can’t make additional home loan repayments over a certain amount.
- If you want to sell your home or change lenders, then you may incur break costs.
- Money saving home loan features are not available.
- Your rate stays the same, which means you can pay more if variable rates drop.
While fixing your mortgage can let you sleep better at night, a variable home loan gives you greater flexibility. Having a variable loan means your interest rates changes with market fluctuations or your lender changes their rate. Thus, your interest rate goes up or down, so your monthly repayment alters. Therefore, if you’re seeking a middle-of-the-road option, then fix a portion of your loan and leave the rest variable.
For instance, a family who wants to pay off their home faster than their term needs a flexible loan option. Nonetheless, the family also want budgeting reassurance. So, rather than fixing all their loan, they fix 50 percent and leave the rest variable.
Subsequently, if the family fixed their $350,000 loan at 4.54 percent over 4-years, their monthly repayment is $1782. Although if they leave their loan variable, then their rate would be 4.09 percent or $1,690 per month. The difference in payments is $82 per month. However, within 12-months, the variable rate rises to 5.56 percent. Thus, the family is now paying $2001 per month or $219 more than the fixed rate.
Hence, the family fix 50 percent of their loan at 4.54 percent and leave the rest variable at 4.09 percent. Initially, their repayments would be $891 for the fixed portion and $845 for the variable portion or $1,736 per month. As a result, this option then allows the family to pay off the $175,000 as quickly as possible. While, on the other hand, the remaining $175,000 has a fixed, more affordable rate giving the family budgeting assurance.
Are you considering fixing your home loan? If so, then start with our free Refinancing Report to discover your potential savings, lowest interest rate, and receive a complimentary home loan consultation.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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