Should I fix my home loan interest rate?

As we know, the RBA left the official cash rate at 2.25% on 3 March, 2015. Given the low home loan interest rate environment we are currently experiencing, a common question is: Should I fix my 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 your situation and assess whether your mortgage is working for you.

If we are to get to the heart of the matter, fixing your home loan interest rate is less about the actual interest rate and more about your financial position. Choosing to lock in your interest rate will keep your repayments the same for a known period of time, thereby removing uncertainty. If you have a tight budget and any increase in mortgage repayments could cause you financial stress, then it is worth considering fixing all or part of your loan. If you have reasonable surplus cash flow, and a rate increase is not going to ‘cost you the farm’, then it may be appropriate to keep all of your loan on a variable rate.

While currently analysts are predicting that rates will stay low, the outlook can change over short periods of time. In the year between October 2009 and November 2010, variable interest rates unexpectantly rose by around 2% per annum. A rate rise of 2% doesn’t sound like much but to put it into perspective, at this time it equated to a repayment increase of 27% in a twelve month period (2%/7.3%x100=27.4%). The impact experienced by home owners was varied, however, for some it was a lot worse than others.

If you are thinking about fixing your rate, we have listed some key considerations:

Pros

Easy to budget for mortgage repayments
No need to worry about actual or potential rate rises
It would seem 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 could apply
Interest rate drops won’t benefit you

Another option is to fix a portion of your loan and keep the rest on a variable rate. As interest rates are at historic lows and are expected to stay reasonably flat, fixing up to half the loan for between one to three years could be attractive. However, you can scale this depending on your financial situation by fixing a higher portion if your budget is tight, or a lower portion if you feel financially comfortable to do so. As the interest rate outlook is currently flat to slightly lower, fixing for a longer period may not always work in your favour.