With the Reserve Bank of Australia (RBA) flagging an imminent interest rate rise, should you be fixing your home loan interest rate now before it’s too late?
For the last few years, while the world’s economies battled against the pandemic, the RBA reassured Aussie home buyers that our historically low interest rates would remain as they are until at least 2024.
Despite the voices of doom and gloom, and with the official cash rate remaining at just 0.10%, the always robust Australian property market went into hyper-drive. Week after week property analysts reported record breaking house prices, even in the (some would argue) already overpriced Sydney market.
Anyone who could, jumped onto the property ladder, secure in the knowledge their low home loan interest rate would remain that way until for at least another three years.
But now that’s all about to change.
You may be asking yourself, should I fix my home loan now before the rates are increased? Or should I just ride the wave of interest rates rises? While that’s a very personal decision, here’s something you should think about or discuss with your mortgage broker before making any decisions.
When deciding between a fixed rate or variable rate home loan, it’s also worth considering the pros and cons of each.
Fixed rate home loan – your interest rate is fixed, usually for somewhere between one and five years. Once your initial fixed rate period is over, you can choose to lock in your loan for another fixed rate period, or move to a variable interest rate.
Pros: You know what your monthly repayment will be for the next *fixed rate period*. Great for budgeting and saving. Peace of mind knowing what your repayments will be for the next few years.
Cons: There may be limits to how much ‘extra’ you can pay off your loan. This means your principal stays larger for longer. If you’ve never been in a position to pay extra towards your mortgage, but were someone who was able to take advantage of the pandemic lockdowns and restrictions and threw all that extra money at your home loan, these limits may come as a bit of a shock.
Variable interest rate – your home loan interest rate varies with every rate reduction or rise announced by the RBA and then passed onto you via your lender.
Pros: When lower interest rates are announced and passed onto you, your repayments will reduce. There’s also more flexibility and features such as offset savings accounts and redraw facilities. These extras, if you’re looking to pay a little bit more on your home loan regularly, can offset the benefits of a fixed rate loan.
Cons: When interest rates rise (as is the expectation in the latter half of 2022), so too will your monthly repayments.
It’s been a long time since the RBA raised its official cash rate. It was actually way back in November 2010. That’s more than twelve years ago.
Therefore, there’s now an entire generation of home buyers who’ve never experienced an interest rate rise. This could go a long way to understanding why so many borrowers are so nervous about an impending rate rise.
But interest rates rises are just a part of financial life. And with the RBA and other financial experts hinting the increases will be slow and steady, you’ll almost certainly have enough breathing space to sit down and look at your finances.
Just as with the interest rate is on offer, fixed rate home loans vary from lender to lender. While they’re pretty similar in how much extra you can pay and the penalties for repaying your home loan early, there will be differences once you start to scratch the surface.
However, one thing you will often find is that you could pay more in the short term, interest rate wise, for the security of fixing your rate for an extended period of time. The rule of thumb is the longer you lock in your loan, the higher the interest rate.
With rising inflation, sky-rocketing fuel prices and an interest rate rise on the horizon, you’d be forgiven for being a bit nervous. But if you find it’s more than just nerves relating to this sudden triple whammy of more money coming out of your pocket, pick up the phone and speak to a professional. As your local Melbourne mortgage broker, I’m here to help you.
Now more than ever, it’s important not only to understand the differences between fixed and variable home loan interest rates but to talk to your mortgage broker about your options. This way, you’ll have an expert advising you, helping you as you make the decision that’s best for you and your family.