Prior to the Global Financial Crisis and the crash of climbing interest rates, many homeowners turned to fixed loans and locked down their rates, afraid that the interest rate would climb into double digits.
Australia Bureau of Statistics figures showed after the GFC customers steered away from fixed loans with just 5 per cent of new customers locking in rates in both 2009 and 2010. But in recent years, the numbers have slightly increased, 8 per cent of customers locked in rates in 2011 while 13 per cent locked in their loans in 2012.
Today, with Australian fixed rates currently at an all-time low and some lenders offering below 5 per cent for three years, many Australians may be thinking about switching their variable interest rate home loan to a fixed rate home loan.
Variable loan vs. fixed loan?
In Australia, there are two basic types of interest rates on a home loan: variable and fixed. With a variable rate, the amount of interest you will pay usually (but not always) fluctuates with the movements of the official cash rate, determined by the Reserve Bank of Australia. For example, if the cash rate goes up, so does your interest rate and thus the repayments on your home loan.
On the flipside, with a fixed rate mortgage, the interest rate remains frozen for a period of time – usually between one to five years. At the time of writing, many financial lenders were offering fixed rate loans at a lower interest rate than their standard variable counterparts. This is good news for cautious home owners looking for peace of mind, and certainty of repayment amounts when it comes to making repayments on their mortgage.
What are the benefits of fixing a home loan?
There are several reasons to fix your home mortgage. The first is a fixed rate gives you stability and peace of mind, knowing how much you will pay every month. If you want to keep a tight control on your budget and have the certainty of knowing how much you need to pay and are worried about rates increasing, fixing your rate can provide you much needed stability to help you get your finances back on track. Moreover, fixed rate loans are a lot more flexible than they have been in the past with some allowing you to make extra repayments.
When is the best time to fix a home loan interest rate?
The experts say that the ideal time to fix your home loan is when the interest rate cycle is at its lowest point. However, the truth is, it is impossible to predict when rates have hit their lowest and even the experts get it wrong. If you want some certainty but also want the ability to make extra repayments, a good option is to consider a ‘split loan.’ You can fix a portion of your loan and keep the rest variable. In this circumstance you will get the best of both worlds.
If you get your timing right, fixing your home loan’s interest rate can be a smart move. That said, watch out for penalties such as fees for paying early or restrictions on making extra payments. Before signing on the dotted line, make sure you understand the terms of a loan. It is best to speak with a mortgage broker, like Aussie, or your independent financial adviser before making any decisions.
Andy is the National Head of Product for Aussie Home Loans. Andy has recently joined Aussie after spending the past 10 years in CBA’s retail banking business leading product and sales teams. Andy is a qualified Chartered Accountant with a Commerce/Law degree from UNSW and an MBA from INSEAD in France.