It is said that Aussies will bet on anything – even two flies crawling up a wall. Our bets have become a bit more sophisticated and now it seems the latest “bets” are taken between economic commentators on what the Reserve Bank of Australia (RBA) board will do to the cash rate on the first Tuesday of every month. The betting odds are pretty low so it won’t be commentators who will lose too much; it’s the mortgage holders who have more skin in this game.
However, while the economists monitor the manoeuvrings of the RBA, the banking regulator, the Australian Prudential Regulation Authority (APRA) has made the lending rules major banks must follow a bit tighter.
So Should You Fix Your Home Loan Rate?
Well, regardless of whether interest rates are going up or down, before you act, carefully consider both sides – the advantages and disadvantages of fixing your interest rate.
Advantages of a fixed home loan
Although the obvious advantage is that when you choose a fixed rate, mortgage repayments will not increase with rising interest rates, this hasn’t been the issue over past years. But with bank-driven increases, this advantage is again becoming reality. You know in advance what your home loan repayments will be for the fixed period, and you can usually choose terms of between one to five years. This helps to remove the guesswork.
Disadvantages of a fixed home loan
Clearly, the biggest disadvantage is what happens if interest rates continue to drop – home loan borrowers who fixed when the cash rate hit a then “historical” low in 2013 at 2.75% are now paying more than if they’d waited. Rates were originally reduced with the hope of reinvigorating the overall economy but even the experts couldn’t have foreseen that the expected growth wouldn’t follow. Instead, the biggest consequence has been the skyrocketing house prices.
Another downside of a fixed interest contract is you may not be able to make extra repayments and there is usually a sizable penalty for paying out your mortgage earlier or breaking your contract. This must be factored in.
It’s obvious that the usual economic rules don’t seem to be working (and the banking rules have changed), so there is no recent precedent to rely on with regard to fixing.
Still, with the cash rate so low, some lenders are offering fixed interest rate mortgages close to or even lower than the standard variable rate, although many come with terms such as applying to new customers only. If you’re thinking of refinancing to reduce your mortgage repayments even further, read your loan documents carefully to make sure it’s worth it.
So, if you’re thinking of changing to a fixed rate, think carefully, read the fine print and do the sums. Life is about choices and nobody should make this decision for you. In the meantime, keep paying your mortgage off regularly and make additional payments when you can.
If you have any questions or would like to a discuss your mortgage, please contact us.
Kate Beaumont is an Authorised Representative and credit representative of AMP Financial Planning.
Blueprint Planning Pty Ltd (ABN 78 097 264 554), trading as Blueprint Wealth, is an authorised representative and credit representative of AMP Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee 232706.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.