It’s common for us to hear the question of whether it’s still possible to get a fixed home loan rate. The answer is yes – getting a home loan with a fixed rate is definitely doable. But first, it’s important to consider if this is the best option for you. The first step is to understand the difference between a fixed vs variable home loan. Here we’ll run through each type of loan to help you understand the pros and cons of each.
If you conclude that a fixed-rate home loan will be more suitable, it’s definitely an option.
Variable-rate home loans
Variable-rate home loans have typically been more popular than fixed-rate ones. Historically, 85 to 90 per cent of home loan interest rates have been variable. In the current environment of rising interest rates, variable-rate loans have fallen to around 60 per cent vs 40 per cent fixed. To understand why variable-rate mortgages have been so popular, let’s consider the benefits.
Pros of variable-rate mortgages
- Repayment flexibility – variable-rate loans give you more options for making repayments. This includes the ability to repay the loan fasters without having to pay interest rate break costs.
- More features – some variable rate mortgages come with features such as offset accounts and redraw facilities. An offset account is a transaction account attached to a home loan. By keeping a balance in an offset account to use for everyday transactions, you reduce the outstanding balance on the loan and the interest charges. With a redraw facility, you can make additional repayments which reduce your outstanding balance and the overall interest charged. With a redraw facility, you can redraw funds from your mortgage when you need them.
- Easier to refinance – with a variable rate loan, it might be easier to switch to a different mortgage product without having to pay break costs.
- Pay less when interest rates fall – when official rates fall, lenders will reduce rates on variable loans, which means you’ll benefit with lower payments and less interest paid overall.
Cons of variable rate mortgages
- Pay more when rates rise – lenders can raise interest rates at any time, increasing the required minimum repayments. This is more likely when the Reserve Bank of Australia raises the official cash rate. Recent interest rate increases mean that borrowers on variable-rate loans are paying substantially more. For example, a $500,000 mortgage at 1.89% in March 2022 had a minimum repayment of around $1,800 In January 2023, with an interest rate of 4.46%, the minimum payment is around $2,500 per month.
- Uncertainty around cash flow – the potential of future rate increases creates cash flow uncertainty for borrowers. If you’re on a fixed budget and your minimum repayments are increasing, it can become challenging to make repayments.
Fixed-rate home loans
As noted, these have not been as popular as fixed-interest rate loans. Given recent rate increases, more people have been switching to fixed-rate loans.
Pros of fixed-rate home loans
- Protection against increases in interest rates – when you get a fixed-rate home loan, you will not have to worry about interest rates and repayments going up during the loan term, which can be 1 to 5 years. When interest rates are rising, locking into a fixed-rate loan can save you during the fixed term. Keep in mind that the rate you apply for might not be the rate you get when settling the loan if the fixed rate increases before settlement. Some lenders are able to guarantee the fixed rate when applying but might require a rate-lock fee.
- Payment certainty – when you get a fixed-rate loan, you won’t have to worry about your minimum repayments increasing over time if the variable interest rate rises. Knowing your repayments will not change can help you manage your budget and control your cash flow.
Cons of fixed-rate home loans
- No benefits from rate decreases – while you won’t have to worry about needing to make bigger repayments, you won’t get any benefits if interest rates decrease.
- Fewer features – many of the handy features available with variable-rate home loans are not available with fixed-rate home loans.
- Less flexibility – some of the features with variable interest rates, including offset accounts and redraw facilities, give you more flexibility in making repayments and paying off the loan sooner. In addition, large break fees can apply with fixed-rate home loans if you decide to refinance, sell your home, or repay the entire balance before the end of the loan term.
Split-rate home loans
If you haven’t made up your mind about which is better – a fixed or variable-rate home loan – a split-rate home loan lets you get the benefits of both types of loan.
What is a split-rate home loan? Many lenders provide the option to split a home loan between fixed and variable accounts to help you hedge your bets and take advantage of the benefits of both types of loans.
Having a part of the principal in a variable loan means you get access to helpful features, such as offset accounts and redraw facilities. So if you keep a balance in an offset account and make extra payments into a redraw facility, you can lower the interest you pay during the loan term and pay off the loan more quickly.
With a portion in a fixed-rate home loan, you won’t feel the full brunt of rate increases if they occur. This can help reduce uncertainty and give you peace of mind.
Example of a split-rate home loan
Let’s say your mortgage is $500,000, and you decide to split it 50/50 between a variable and fixed-rate loan. In this situation, the minimum repayments for the $250,000 variable portion could increase during the loan term. At the same time, you can make extra repayments or use your offset account to reduce the loan balance. With the other $250,000 under a fixed rate, you won’t have to worry about higher repayments for this part.
If you choose a split-rate home loan, you would have to consider the split that will work best for your needs.
Other factors to consider when choosing between a variable and fixed-rate home loan
You might be in a position where other factors – besides interest rates, features and flexibility – come into play when choosing the best type of home loan.
For first-home buyers, a split-rate loan could be the best option by providing the benefits of both types of loans.
Long-term investors might want the certainty that comes with a fixed-rate loan.
For investors looking to renovate and sell a home in the near future, a variable-rate loan provides more flexibility when selling.
Questions to consider when choosing a home loan
Your choice will depend on your circumstances and other factors, including your view on interest rate increases.
- Where are interests heading in the future?
While no one has a crystal ball to predict the future of interest rates, and economists don’t always agree, interest rates won’t increase indefinitely. Senior economists for the major banks are predicting that the cash rate will increase to between 3.35% and 3.85% in 2023. Some believe that rates will start to decrease in 2024. But there is no way to be sure that these forecasts are accurate. If rates continue to increase, a fixed-rate loan might be the best option. On the other hand, if rates begin to decrease, you would benefit from a variable-rate loan.
- If interest rates rise, will I be able to make repayments?
Given the experience of 2022 interest rate increases, you will want to consider if you can make repayments if the minimum amount increases if the cash rate increases.
- Do I want features such as an offset account and redraw facilities?
These will help you repay the loan earlier and save on interest charges if you are able to make extra payments or keep a balance in the offset account. If you want these features, a variable-rate loan or split loan are better options.
- If I choose a split loan, what is the best split between the two types?
It could be 50/50 between variable and fixed, 60% variable and 40% fixed, or some other amount. The choice will depend on your financial situation and goals.
- How long will I want the home loan for?
If you are considering a short-term investment property, break fees and charges need to be considered when choosing between a fixed and variable-rate loan. If you’re not planning to keep the loan for the full term, you will have to pay hefty break fees.
Getting expert help to make a decision
In answer to the original question, the answer is “Yes, you can still fix your home loan rate”.
The details to consider when choosing between a variable-rate or fixed-rate home loan might seem confusing. Fortunately, the experts at Reduce Home Loans are ready to help you.
Get in touch to discuss your options with a home loan expert at Reduce Home Loans.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.