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.