An interest rate rise was something Aussies hadn’t really seen since 2010 – back when cinemas were showing Avatar, Instagram was just an idea, and Lady Gaga turned heads in her iconic meat dress. Cut to the next decade – we have an Avatar sequel, and we’ve seen mortgage rates rising almost monthly.
So how do we sleep while the rates are rising? Working out what’s best for you (without burning the midnight oil) starts with choosing between a fixed, variable, or split loan.
If you’re scratching your head and wondering ‘Should I fix my home loan?’, we’ve got a few hot tips to help you make your decision. Let ME explain.
Why has there been a home loan rate rise?
The Reserve Bank of Australia has increased the nation’s cash rate to help manage inflation, employment and the growth of the economy. Of course, the result can be rising interest rates on home loans (should banks pass the rate rise on). This leaves customers wondering if they’re better off with a fixed or variable rate loan, so let’s compare.
Team fixed rate home loan.
Like some certainty? With fixed home loan rates, you can feel more secure with a set rate (and press the mute button on talk of rate rises) over the fixed term. Since your mortgage interest rates won’t change along with market fluctuations, you’ll pay the same repayments. It’s good for budgeting if you’re planning to walk the Inca Trail, or down the aisle.
Though if rates go down, you might have to adjust to the fact you’re paying more each month than you would be on a variable rate. You can also make additional repayments on a fixed rate loan – up to $30,000 extra during the fixed rate period before this potentially attracts break costs.
It’s easy to romanticise a great fixed rate, but it’s good to be clear on a few things first. A fixed rate is often locked in at a higher rate than variable, so while you might be comfortable with the idea of paying the same amount each month, if interest rates stop rising you also need to be happy with paying more.
Also, be sure you understand the variable rate you’ll be paying once your fixed term ends. Also called a ‘revert’ rate, this might be much higher than the fixed rate, so make sure you can cover any increased repayment costs. Also bear in mind the fact that a fixed rate is often higher than the standard variable rate.
Best for: those who find comfort in the certainty of locking something in, like the same meal at the same restaurant over and over and over.
Team variable rate home loan.
Variable rates change with the market. And while the rate rise poses questions about whether switching to a fixed rate is better, there ain’t no guarantees. Of course, one clear benefit of variable rates is that your repayments go down if rates do.
You can also use a redraw facility to make extra repayments – and withdraw them when you need them, so you can adjust access to your funds to meet your lifestyle. Plus, those additional payments come with no restrictions, unlike fixed rate loans. Another benefit is the ability to link an offset account (basically a transaction account) to your home loan, to reduce interest and pay off your loan faster.
It’s good to keep in mind that you can usually only hook an offset account to a variable loan. But, really, it’s the level of flexibility you desire that determines the best choice for you.
Best for: anyone who enjoys the highs and dips of a theme park ride.
Team split home loan.
Iffy about commitment, but also keen to lock in a good thing? Luckily, home loans are easier than dating. Meet split loans. These let you divide different portions of your loan between fixed and variable rates – so you can enjoy some flexibility, and some certainty.
Best for: those who spend a long time deciding sweet or savoury at brekky.
Is your fixed rate ending?
If the end of your fixed rate period is coming up, make sure you give yourself three months before its expiry to review your home loan. Take this time to ask yourself whether your home loan suits your lifestyle and financial situation.
When your fixed rate interest term ends, you’ll have the option to re-fix or switch to a variable interest rate.
When will interest rates go down?
How long is a piece of string? Interest rates are tricky to predict, but if you want to get poetic about it, much like the tide, they will eventually fall again. Think of it this way – there might be a third Avatar film released by then.
So, what can you do right now? Staying on top of market trends will help you keep up to date and make an informed decision about your home loan.
Our Rate Rise Customer Hub is a great place to start for resources (without the banking jargon).
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.