Fixing your home loan interest rate eliminates the risk of loan repayments increasing as a result of interest rate rises. Many homeowners are hoping to pick the perfect moment in the interest rate cycle when fixed rates are at their lowest and variable rates are about to rise, aiming to lock in a low rate while the variable rises. So, should you fix your home loan interest rate now?It’s a question that mortgage holders ask regularly. The truth is that it really depends on your individual situation.
Ask the ‘Why?’ Question first
Before you ask if you should fix your home loan interest rate, a better question is “why am I considering fixing my interest rate?”
Ask yourself if you can afford to take the risk of interest rates rising and your loan repayments increasing.
To fix or not to fix
A few of the pros and cons of fixing your home loan interest rate are discussed below to help you consider the implications:
Some pros of fixing your loan interest rate:
- Certainty of repayment amounts for the term of the fixed-rate period
- You’re protected against any rate rises and corresponding increased loan repayments
For example… what if you’re starting a family and your husband is taking extended leave care to care for your new baby?
Things have changed. Life’s going to be very different.
You now face the real risk that increases in rates and monthly repayments will have a significant impact on your reduced family budget. Can you afford this?
If your new situation is going to cause financial stress then fixing the rate on your home loan might be the way to go until your circumstances change.
Some cons of fixing your loan interest rate:
- If rates fall you won’t get the benefit as your repayments will stay at the rate you fixed
- Penalties may apply for additional lump sum reductions and repayments
- Penalties may apply if your loan is paid out during a fixed-rate term
- Offset accounts and redraws are often excluded from fixed rate offers
So if you fix the rate just to save the amount of interest you pay, you may also lose the benefit of your offset account or the ability to redraw any advance payments made. You may also face hefty penalties if you sell your property and pay the loan out before the fixed rate period expires.
So, even if you’re spot on picking the rate cycle, the benefit could be cancelled out by penalties and loss of flexibility. And if you get it wrong and interest rates don’t go up, things could be worse! You’d achieve exactly the opposite of what you set out to do – by paying more interest than on a variable rate.
Here are some questions to help you consider a fixed v’s variable home loan rate:
- Do you use an offset account or a redraw facility?
- Is it possible you’ll make additional repayments or pay out the loan within the fixed rate period?
- Are you looking to sell your property soon?
- Is there likely to be a change in your household income?
- Would you be happy to pay a slightly higher rate for the certainty of loan repayment amounts?
Ultimately, though, you need to consider if you can afford the increased loan repayments if rates rise.