You don’t need to be an economist to realise that interest rates have increased since the beginning of 2022 after hitting historically low rates. After ongoing rate increases, people are asking, “Are fixed home loan rates worth considering now?” While it might seem as if it’s too late to get a fixed interest rate loan, it’s important to look at all the pros and cons of fixed compared to variable-rate home loans. With that in mind, here’s a quick overview to help you consider the options.
Where are interest rates going?
No one knows for sure, but the cash rate set by the Reserve Bank of Australia (RBA) has increased each month starting in May 2022 and reached 3.35% in February 2023. Among major bank accountants, the forecast is for interest rates to increase until around May 2023 and decrease in late 2023 or early 2024. These are only predictions but provide food for thought when choosing between fixed and variable interest rate loans.
What are the pros and cons of choosing fixed home loan rates in 2023?
As with any financial decision, there are positives and negatives.
Pros of choosing a fixed rate home loan
On the positive side, you won’t have to worry about additional rate rises until the fixed rate term of your loan ends. So if the rates continue to rise as experts predict, this won’t affect you. The big question is, “How much longer will home loan interest rates rise?”
As a result, you know your repayments won’t increase, and it will be easier to budget when you know what your monthly payments will be.
Cons of choosing a fixed rate home loan
When rates begin to fall, you won’t see any benefit if you are still in the fixed rate period and will have to continue paying the higher rate.
Another drawback with fixed rate home loans is the lack of features, such as offset accounts and redraw facilities. If you’re unfamiliar with these, an offset account is a transaction account attached to a home loan. A redraw facility enables you to make extra payments and withdraw these funds when needed. In both cases, keeping funds in these accounts lowers your home loan balance and interest charges.
With a fixed rate home loan, you will have to pay a large break fee if you decide to switch to variable rates or decide to refinance before the fixed rate term expires. Also, at the end of the fixed rate term, your lender can switch to a higher variable rate (the revert rate) unless you take steps to refinance the loan.
Pros of choosing a variable rate home loan
When interest rates start to decrease, you’ll save money on interest and repayments. Again, there’s no exact forecast of when this will happen.
With a variable-rate home loan, you’ll more likely have access to features such as an offset account or redraw facility. If you use these to lower your loan principal, you will reduce interest charges. The benefit you get will depend on how much you can keep in the offset account or the extra payments you apply to the redraw facility.
Risks of choosing a variable rate home loan
The main risk associated with variable rate home loans is if the interest rates keep increasing. While most economists think rates will decrease in late 2023 or early 2023, it’s not certain this will happen. For example, if inflation continues to increase, the RBA could keep increasing rates. Historically, the cash rate has been higher than it is now. For example, in mid-2008, it reached 7.25% and hit 17.50% in early 1990.
Reasons not to choose fixed home loan rates
Before making your decision to fix your loan, consider these points:
- If you’re considering refinancing during the fixed-rate term, it will cost you high break fees.
- If you plan to use the equity in your home to renovate or rebuild, you won’t get the flexibility you need with a fixed rate home loan.
- If you’re planning to sell your property during the fixed-rate period, break fees will cost you.
- If you think it’s highly likely that interests have peaked or if they have started falling already, you will want to consider a variable rate loan.
If you’re on the fence, you could split your loan between fixed and variable to get the benefits of both types of loans – such as a rate lock with the fixed part and the features that come with variable rate loans.
Getting help through the home loan maze
With so much to consider when choosing between variable and fixed home loan rates, it’s good to get expert guidance. At Reduce Home Loans, our mission is to find the best loan for your needs and to deliver exceptional customer service.
Not sure which home loan is right for you? Contact Reduce Home Loans for a better home loan experience and a great rate.
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.