Recent figures have revealed that only one in six Australian home owners are choosing to fix their home loan. However, with speculation of an interest rate rise due to hit later this year, it could be time to consider fixing your current loan.
Variable vs Fixed Loans?
There are multiple options when deciding on the type of home loan you can hold. Many Australians have been opting for variable rate home loans, meaning that their monthly repayments will move with changes to market interest rates. As a result, repayments will ‘vary’ as the rate changes. With interest rates having been at record lows in the last 12 months, this option has been incredibly beneficial for those looking to limit their interest paid.
Variable home loans offer numerous benefits including: less interest paid when market interest rates are low, the option to make extra repayments to help pay off your loan sooner and the ability to set up an offset account to further save on interest. However, this home loan option makes budgeting harder as loan repayments can increase with interest rate changes and adds to mortgage stress due to uncertainty of repayments.
On the other hand, fixed home loans have an interest rate that is fixed for a set period of time – often 1, 3 or 5 years. This means you will know exactly how much your loan repayment will be over the fixed term period. At the end of the term, the loan will usually switch to the standard variable rate offered by your particular lender.
The main benefits of fixing your loan is repayment certainty, the ability to plan ahead with confidence and peace of mind that your repayments will not be affected with rises in interest rates. However there are some disadvantages to fixing your home loan. These include missing out on any benefits from interest rate drops, limitations on voluntary extra repayments and redraw ability, as well as potential break fees for changing your loan within the fixed rate period.
Why is now a good time to think about fixing?
Fixed home loan rates have been at historical lows for the last 12 months or so in Australia. However there is talk in the industry of these rates increasing overseas later on this year, which will result in increases to our own market soon after. With this in mind, home owners must consider what their priorities are and if they’re willing to risk a potential increase in rates by deciding against fixing their home loan.
Unfortunately, no one can accurately predict how interest rates will move in the future. So it’s important to be aware of all the home loan options available to you and choose a loan type that will work for your individual needs.