After over a decade of cutting the cash rate, the Reserve Bank of Australia (RBA) has been increasing rates almost every month since April 2022. Homeowners and would-be borrowers may be nervously wondering how high their home loan rates will go.
The Reserve Bank’s continuing push with interest rate hikes has brought into focus the dilemma that borrowers now face in choosing their home loans.
Should homeowners opt for a variable rate home loan at a time when interest rates could go up further and other cost of living pressures are already putting intense pressure on household budgets? Or should they lock in fixed rate loans that provide stability but risk repayments swelling at a later date?
Impact of interest rate hikes
The RBA hiked its cash rate for the 12th time and it has already had a huge financial impact on home loan borrowers. According to analysis, variable rates on an average $600,000 mortgage jumped from 2.6% in May 2022 to 6.1% in March 2023, translating into a nearly $1,200 increase in monthly repayments over that period.
But the situation is even more stressful for borrowers who locked in fixed term loans during 2020 or 2021, when cheap funding under the RBA’s pandemic measures prompted banks to drop fixed rate loans to as low as 1.95%.
According to data from Corelogic, two-thirds of these fixed home loans will expire in 2023. These borrowings will then roll over to variable rates that could be as high as 7%, suddenly adding hundreds of dollars to monthly repayments.
The issue has already driven strong interest in refinancing as homeowners shop around in search of a better deal or consider locking into new fixed rate contracts.
Are fixed rate home loans still attractive?
Fixed loans are currently available at typically higher rates than variable, but a reason borrowers look for this type of repayment option is the certainty it provides.
With a fixed interest rate, households are able to budget their finances more effectively as monthly repayments remain the same. This makes it easier to plan and manage expenses, especially at a time when everyday costs ranging from groceries to fuel to utility bills have surged.
Fixed home loans offer protection from sudden increases in interest rates similar to the sharp lift witnessed in the current rate hike cycle. Repayments will remain the same even when market rates go up, allowing peace of mind and financial stability. This can be especially beneficial for first-time homebuyers who are still adjusting to their new financial responsibilities.
Disadvantages of fixing
While fixed rates may seem attractive in the backdrop of a rising interest rate cycle, they come with some inherent disadvantages.
These mortgages are not as flexible as variable rate loans because they typically limit additional repayments and also don’t offer access to redraw or offset accounts that effectively reduce interest costs. The borrower also doesn’t benefit from any future interest rate declines.
What to do if your loan is coming off a fixed rate?
In most cases, switching to a variable interest rate will happen automatically after your fixed rate expires, so it will likely not require you to respond. These rates tend to be higher than other deals on the market, as lenders will often reserve their more competitive rates for their new customers so you may end up paying extra in interest by staying with your current lender.
Before you make any decisions, it’s always wise to review your home loan to ensure your loan meets your needs now and into the future.
Here are some steps to help:
- Roll onto a variable interest rate. This will happen automatically if you do nothing.
- Re-fix your home loan interest rate – consider the fixed rate you are being offered carefully first
- Negotiate a lower fixed or variable rate with your current lender
- Research what other lenders are offering – consider refinancing or restructuring your finance
Get help from an expert
With over 70 lenders on our panel on offer, let the team at Seek Financial work through the best home loan options available to help you compare and choose the best home loan for you and your financial situation.
Give one of our experts a call today. We’re always here to help.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.