To fix your home loan or leave it variable is a very important decision and you what you decide could have big impact on your finances. With constant talk in the media of potential interest rate changes, it’s understandable that you may want to know whether you should be fixing your home loan or not. What makes understanding and predicting interest rates rather challenging at the moment is that the banks are changing their interest rates independently of the Reserve Bank’s interest rate decisions. Furthermore, the Australian Prudential Regulation Authority (APRA) which regulates the banks is also changing how banks lend their money, leading to greater volatility in interest rates. Here are some things to consider when deciding whether a fixed or variable or fixed home loan is best for you.
Protection against rising rates
If you’re certain that rates are going to go up, then you’ll want to lock in a lower rate. In the current environment, the banks are still predicting modest rates for the future so fixed rates may be cost effective. If rates do go up, you’ll be comforted to know that you’re paying less. But remember that at some point your fixed rate may increase and you’ll face an increase in your repayments, so make sure you prepare in advance.
Locking in your repayments
Fixing your loan is more than just beating a rate increase. For many people, knowing exactly what their home loan rate is going to be for the next few years can be reassuring. If you don’t have much room in the household budget, locking in your rate gives you the benefit of being able to plan well into the future.
Maintaining flexibility
If you fix your loan, you’re going to be locked into the same lender, same repayment and same loan amount for the duration of your fixed period. If you want to be able to change banks or make extra repayments, fixing your entire loan may not be the best idea for you.
Hedging your bets
An often promoted idea is to split your loan between fixed and variable. It seems like the ideal situation – you get to lock in some of your loan at a fixed rate and not risk of rates going up, while leaving some of your loan variable to give you a degree of flexibility. However, keep in mind that while you get the benefits of a fixed rate with the flexibility of a variable rate, you’re still locked into the one bank for the length of your fixed rate. This means you can’t pursue a cheaper rate on your variable rate which could be problematic if your bank increases their rates faster than others.
Breaking up is hard to do
Keep in mind that if you want to get out of your fixed loan, it could cost you a lot in break fees and exit penalties. It’s impossible to work out at the start of the loan what your break costs will be because they are dependent on the prevailing rate at the time that you wish to break your contract. Your loan contract is written so that should you break your loan, the bank will get compensated for anything that they lose by you leaving. This could cost you thousands or tens of thousands of dollars.
Consistently ranked one of Sydney’s top financial planners (Adviser Ratings), Brenton helps his clients life a great life by making the most of their money. Read his full bio here.
