UPDATE – As of November 2021, a number of lenders are increasing their fixed rates across various terms between 1 and 5 years. If you are thinking of fixing your loan, make sure you speak with your broker about how these recent changes may impact you.
When purchasing a property, refinancing or just renegotiating with your current lender, borrowers can generally decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations. With interest rates at an all-time low, and many lender’s fixed rates significantly lower than their variable options, refinancing to a fixed rate is a very attractive option at the moment. While none of us know what the future holds, we can look at the facts and make an educated decision. Here are the ins and outs of fixed-rate loans.
What is a fixed-rate loan?
A fixed rate loan has an interest rate that is locked in (fixed) for an amount of time that is prearranged between you and your lender. This is typically between 1 to 5 years. This means that your repayments will remain the same during the fixed rate term. There are both pros and cons to switching to a fixed rate, here are some important points to take into consideration before making your decision.
- Locking in the interest rate can offer stability – you can budget better as you know exactly what your repayments will be every month.
- When rates increase your mortgage repayments will stay the same.
- If you want to change loans or refinance before the fixed term expires, there will be a break fee (early exit fee) which could be quite substantial.
- Limited ability to make extra repayments.
- If rates fall further during your fixed term, you won’t benefit with a lower repayment.
- Limited features – offset accounts and redraw facilities are often not offered on fixed rate loans.
Interest rates in the news
Earlier this month, the RBA indicated that the current low cash rate is likely to remain for the next couple of years:
‘The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.’ – https://www.rba.gov.au/media-releases/2021/mr-21-03.html
However, the below article shows as house prices rise, there will be increasing speculation that the RBA will need to raise interest rates earlier than 2024:
End of loan term
It is important to be aware that at the end of the fixed-rate term, your loan agreement will include information about how the loan will then be managed by the lender, usually to a ‘revert’ variable rate – which may not be the lowest the lender offers. The lead up to this is a great time to review your loan to ensure it will continue to meet your requirements and objectives and you continue to get the best rate possible.
It’s fair to say that current interest rates are bad news for your savings account but good news for your home loan. When making the decision between different types of home loans it’s important to assess your budget and make sure that you are happy with all the terms and conditions that come with a fixed rate loan. When you’re ready to apply/switch or if you simply have questions about the home loan process, please contact us and we’ll arrange a time that’s convenient for you to chat about your needs. We’ll compare available products and find the best one for your circumstances, not only that, but we’ll also apply for you and keep you informed every step of the way.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.