In brief

Money Magazine Australia - - CONTENTS - Mark Bris­tow, RateCity

Abadly timed in­ter­est rate in­crease can be all it takes to break the bud­get of a home­owner. And with many banks rais­ing their vari­able in­ter­est rates, it’s easy to feel ner­vous about the fu­ture. Spec­u­la­tion about fur­ther rises makes fix­ing your in­ter­est rate tempt­ing.

Cur­rently, the cheap­est fixed three-year home loan on the RateCity data­base is with Easy Street Fi­nan­cial Ser­vices at 3.59%pa (ad­ver­tised rate). This is only a touch above the cheap­est vari­able rate on the mar­ket, the Re­duce Home Loans Rate Buster at 3.44%pa.

Even if the banks and the Re­serve Bank hike rates, your fixed-rate re­pay­ments will re­main con­sis­tent from month to month. This can make bud­get­ing much sim­pler, which can be handy for house­holds, es­pe­cially first-time buy­ers, with stretched fi­nances.

For prop­erty in­vestors, fixed rates can keep a loan’s re­pay­ments from in­creas­ing be­yond the rental in­come dur­ing the fixed pe­riod. And if you re­fi­nance a home loan onto a lower in­ter­est rate, fix­ing this rate can let you en­joy the af­ford­abil­ity for longer. How­ever, the sta­bil­ity of a fixed rate can come at the cost of flex­i­bil­ity. De­pend­ing on your lender, you may not get to ben­e­fit from an off­set ac­count or re­draw fa­cil­ity. Fix­ing may also lock you into a fixed re­pay­ment plan, where you’re un­able to make ex­tra re­pay­ments, and chang­ing your loan terms be­fore the fixed term’s ex­piry in­curs sig­nif­i­cant break fees. While fix­ing your loan can pro­tect you from ris­ing vari­able rates, you won’t ben­e­fit from any sav­ings if rates drop. Plus, you can usu­ally only fix for a lim­ited length of time, af­ter which the rate will typ­i­cally re­vert to the lender’s stan­dard vari­able rate. Mark the date in your di­ary: the last thing you want to do is start pay­ing ex­ces­sive in­ter­est on your loan just be­cause your fixed term has come to an end.

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