Should I fix my home loan interest rate?

Interest rate announcement – September 2016

Today the Reserve Bank of Australia met to review the official cash rate. After cutting rates in August, the RBA have decided to leave rates on hold at 1.50% this month. We expect that most lenders will leave their rates unchanged, in line with the Reserve Bank’s decision.

After 2 reductions in the official cash rate this year, interest rates are now at record lows. Given this low home loan interest rate environment, many people are wondering whether or not they should fix their home loan interest rate. For most people, their mortgage is likely to be their largest financial obligation, and as such, it is important to regularly review it.

The decision about whether or not to fix your rate is less about the actual interest rate and more about your financial position. Locking in your interest rate means that your repayment amount will remain the same for a known period of time, thereby removing uncertainty. This may be appropriate for those with a tight budget for whom increased repayments may cause financial stress.

While the current consensus is that interest rates will stay low for some time, this outlook can change unexpectedly. Such an unexpected change previously occured between October 2009 and November 2010 during which period variable interest rates unexpectedly rose by around 2%. This might not sound like much but infact represents a 23% increase in the repayment amount. This is based on a $500,000 loan, payable over 30 years, where the interest rate increased from 4.5% pa to 6.5% pa. This impact experienced by home owners was varied, depending on how much their lender increased rates and whether they had a fixed or variable rate.

If you are thinking of fixing some or all of your loan, here are some key things for you to consider:

Pros:

Easy to budget for mortgage repayments,
No need to worry about actual or potential rate increases,
It would seem that the interest rate cycle is close to bottoming.

Cons:

For the period of the fixed rate, any additional repayments you make may incur penalties and charges,
If you need to make a change or sell during the fixed period, costly break fees may apply,
Interest rate decreases won’t benefit you.

Another option is to fix a portion of your loan and leave the rest on a variable rate. Given the current interest rate outlook we often suggest fixing up to half of the loan for between 1 and 3 years. The propotion of fixed to variable loan can be adjusted depending on your financial situation. Contact us if you would like more information or advice on whether to fix your home loan.