Home loans explained
Is a fixed interest rate home loan best for you?
6 min read
It’s only natural to want to keep a good thing going. When interest rates change one of the top questions to ask is should I fix my home loan rate? We’ll explore the pros and cons in a simple way.
When you’re applying for a home loan there are a few different options for you to choose from. Both the type of repayment you make (principal and interest or interest only) and the type of rate you have (fixed or variable) are things you’ll need to consider before you apply. You can find a full breakdown of the different types of home loans here.
But you’re reading this home loan guide so I’m guessing you want to know more about fixed rates, right?
Well, a fixed rate home loan means that the interest rate of your home loan stays the same for a fixed period of time (usually 1-4 years). After that period is over your interest rate changes to the ‘roll-to-rate’ stated in your home loan contract. This is different to a variable rate that can change right from the start of your home loan.
There are a number of different factors that can cause interest rates to rise or fall. Every month (except January) the Reserve Bank of Australia (RBA) has a meeting to chat about how the Aussie economy is going and to decide whether they will shift the cash rate. Usually home loan variable rates follow the lead of the cash rate and will move the same way it does.
If the RBA wants to encourage Australians to spend more cash, they’ll lower the cash rate (so interest rates drop), and if they want to slow spending down to encourage saving, they’ll raise it (so interest rates rise).
An easy way to think of it is that low interest rates are good if you’re looking to spend money (getting a loan) and high interest rates are good if you’re wanting to save your money (in a savings account). Lenders can also choose to raise or lower their rates independent of cash rate changes. You can read more about why variable rates change here.
Because fixed rates stay the same throughout their fixed period, they do take into account predicted rises or falls in the market and are usually priced accordingly. So, if lenders expect there to be a future drop in the cash rate, their fixed rates will likely be lower than their variable rates, and vice versa if they are expecting a rise.
As part of our responsible lending commitments, and so we can understand how you want your home loan to work in line with your financial situation and goals, you’ll be asked a series of questions (as part of the application process). Then we’ll provide you with a product recommendation that suits your requirements, which includes if a variable or fixed rate is suited to your needs.
So, when should you consider fixing your home loan rate and when should you stick with a variable rate? First, it’s important to understand the pros and cons of fixing so you can decide what will best suit your situation.
Fixing your home loan rate means that you’re securing that interest rate for a fixed amount of time. When interest rates are low, fixing your home loan rate ensures your rate stays that low for your fixed period. This means if you secure a low fixed rate before a rate rise, you’ll save money on repayments while your mates on variable rates experience a rate jump.
The added bonus of having a fixed rate is that your home loan repayments stay the same throughout your fixed period. Meaning you can budget more effectively and rely on not having to pay more than expected. Think of it like an insurance premium – you’re paying for protection, which in this case, is protection against rising interest rates.
Before you rush to fix your home loan, there are some things you need to be aware of about fixed rate home loans.
Firstly, they have less flexibility, including large break costs for breaking your contract before the fixed period ends. If you’re planning to move house soon or not sure what the short-term future holds, it may be best to stay with a variable rate.
If paying your home loan off quickly is a priority to you, switching to a fixed loan may not be the right move for you either. You are typically capped on the amount of additional repayments you can make to reduce your loan balance, and can be charged fees if you do. With variable loans, you can make as many additional repayments as you like, which means a shorter loan term and less interest paid.
Having said that, a great (and rare) feature of Tic:Toc’s fixed rate home loan, is you can opt to have an offset account attached to your home loan for $10 month. This means you can reduce the amount of interest you pay (and your loan term) by keeping your savings in this account, without getting penalised by paying down too much of your principal loan balance.
In other words, you’re getting the security of the fixed loan, as well as the flexibility of being able to reduce your loan term and redraw via an offset account. Yahoo!
Learn more about pairing a fixed rate home loan with an offset account here.
One final potential con to think about? Interest rates may actually stay low longer than you expect. And you may end up paying more on your fixed rate than you would on a variable. Sadly, there’s no way to be 100% certain.
Whether or not you decide to fix your rate, when interest rates are low you should still consider refinancing to make sure you have a good deal on your existing home loan rate. If you’re on a lower variable rate, if rates do go up, at least they’ll go up from a lower base. While refinancing your loan is normally a pain, it doesn’t have to be.
Tic:Toc has a fully online application and approval process, that cuts out the time and complication. And cost. Which means it's possible to get your loan docs delivered on the same day you apply. Win, win.
If you’re looking to buy your first home all you need to do is find a fixed home loan that you like and apply, you can check out Tic:Toc’s fixed rates here. And if you’ve already got a home loan it’s much the same, except once you’ve found a fixed home loan you like you’ll need to refinance your current home loan.
Unfortunately none of us are fortune tellers, so there’s no way to know for certain that any one point in time is the ‘right’ time to fix your home loan rate. What’s important is that you know the benefits and drawbacks of fixing, and you take the time to review your current situation as well as what you need from your home loan. If you want to know more about fixing your home loan – let’s talk!