With interest rates at a historic low, I’ve been asked a lot about whether to lock in home loan repayments at fixed rates, or wait and see if there are more rate cuts on the horizon. Unfortunately there’s no right answer, and ultimately it’s up to you.
With that said, it’s important to understand the pros and cons of each option, so you can make a decision about what’s right for you.
On the variable rate side:
- There might be more interest rate cuts to come (though who knows how much the banks will pass on!)
- Variable rates seem to be the ‘flavour of the month’, which means more competition in this space, and more lenders to choose from with very competitive products and rates
- They offer more flexibility, with many allowing additional repayments, minimal exit fees, and offset accounts
- If rates go up, so will your repayments! While banks were fairly reluctant to pass on the recent rate cuts, it seems like a safe bet that they’ll be quite happy to pass on any rate increases that may come along
- There’s also speculation that some of the banks will be increasing their variable rates in the coming months even if the cash rate stays on hold.
On the fixed rate side:
- Is there much room for interest rates to go lower?
- You get the certainty of knowing what your repayments will be during the fixed period
- Some lenders have started offering offset accounts with their fixed rate loans
- Watch out if you need to repay or exit the loan early! If rates have gone down since you got a fixed rate loan, the break costs can be very high. If interest rates haven’t changed since you got a fixed rate loan, the break costs could still be significant. In short, make sure you’re unlikely to want or need to repay the loan before the end of the fixed term.
So… there are pros and cons of both options, and it’s up to you to decide which is right for you. You can pick one, the other, or even hedge your bets and get a loan that gives a mix of both.
If you have or are thinking about taking out a home loan and would like to discuss your options, I encourage you to get in touch for an obligation-free chat.
Noah Cohen is Mortgage Broker with Origin Finance, and is a Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)