Rising interest rates have put borrowers on notice this year, after the RBA began hiking the cash rate by 50 basis points a month, following close to 12 years without a single increase.
Before this, a lot of people were happy paying variable rates on their mortgage because they were at historic lows, meaning less money donated to the banks in interest than ever before.
Heavily discounted fixed rates were on offer early this year, until suddenly they began to soar. Not long after that, the RBA began to hike and variable rates followed suit.
Now, with many fearing that rates could continue to go up and up, especially if you listen to what the media is saying each week, and the prospect that defaults could become a reality, people are beginning to pay more attention.
Recently, lenders began to lower rates on their fixed rate products again, so is now the right time to fix your home loan?
Steady as she goes
Fixing a home loan is not always about grabbing the lowest rate on offer. It’s a strategy that comes with pros and cons and will invariably suit some people better than others.
A fixed rate can give you stability and certainty for budgeting purposes. If you are the type of person who wants to be able to plan exactly where your cashflow is directed for lengthy periods, a fixed rate term of several years can allow you to do so without having to worry about sudden or multiple payment increases affecting your strategy.
If rates rise during your fixed rate period, you will go on paying the same rates that you had locked in, while others pay more.
If rates went down, however, you might find yourself paying more than you needed to.
If they went down at the beginning of a fixed term of multiple years, and kept going down, you might find it harder and harder to deal with.
There are plenty of stories out there about people who locked in rates of 7 or 8% during the uncertain period following the GFC, only to then watch variable rates plummet for everyone else during that time. That would have been hard to take.
Fixed rate products can also be limiting if you want some flexibility to move money around or make extra repayments. Variable rate loans are the ones that have more features like offset accounts, redraw facilities and the ability to make unlimited additional repayments; all handy if you’re looking to reduce the amount of principal that you are paying the interest against.
The other obvious thing is that things change in life and if for one reason or another you need to refinance or sell, a fixed rate loan might mean you need to pay expensive fees or break costs for the privilege.
Why not have both?
These days, many borrowers choose to fix a portion of their loan and leave the rest as a variable. If you split it 50/50, that’s half the value of your loan that isn’t affected by unforeseen rate fluctuations, while the other half is where you can make your savings in the form of extra repayments or by taking advantage of extra flexibility.
If you want to find out if fixing your loan is the best move for your circumstances, click below to get in touch with Zinger Finance.