A looming economic crisis during the COVID-19 pandemic prompted the Reserve Bank of Australia (RBA) to announce a historically low cash rate of 0.1 per cent. Following the rate cut by the RBA earlier this month, most lenders slashed their fixed rate to less than 2 per cent per annum but did not pass on the benefit to variable rate home loans.
The home loan interest rates in Australia are at a record low, compelling homeowners to consider shifting from a variable to a fixed-rate home loan to reduce their property debt. To give you an idea, the average variable mortgage interest rate for December 2020 is 3.31 per cent per annum. In contrast, the average 2-year fixed-rate home loan interest is only 2.35 per cent per annum [Source: Mozo.com.au].
On an average loan size of $400,000 for a term of 30 years, switching from 3.31 per cent per annum to 2.35 per cent per annum could reduce your monthly repayment amount by over $200. This adds up to more than $1200 in a year that can be used elsewhere. Of course, fixed-rate home loans and variable rate home loans differ in terms of the associated features. But, if your fixed-rate allows additional repayments, you may also use your savings to hammer down your debt harder.
What You Need to Know Before Fixing Your Home Loan
If you are thinking about fixing your home loan, this is certainly not a bad time. Yet, lenders may reduce the rates further, and it falls upon you to decide whether 2 per cent per annum is a comfortable mortgage interest rate for you to lock-in. Additionally, it is also essential to consider factors other than the interest rate, including the terms and conditions and the drawbacks of fixing, to ensure you make an informed decision.
For example, moving to a low-interest rate home loan will perhaps save you money. But fixed-rate home loans have different features and conditions as compared to variable rate home loans. It is, therefore, essential to understand what you are getting into before signing the dotted line.
Let’s begin by decoding what it means to have a fixed-rate home loan. A fixed-rate home loan is one where your interest rate is pre-determined or fixed for a specified period, generally for 1, 2, 3, or 5 years. Suppose that you take out a fixed-rate home loan with a fixed period of 2 years. In that case, your monthly repayment amount will be set during the period, regardless of the interest rate fluctuations in the market. At the end of the designated period, your loan will revert to the lender’s ongoing variable rate, as stipulated in your home loan agreement.
Pros and Cons of a Fixed Rate Home Loan
At present, you can lock in a fixed interest rate of less than 2 per cent with several lenders in Australia. While this may save you a lot of money over time, it also means that you won’t be able to take advantage of future rate cuts in the fixed period. That being said, the RBA’s official cash rate is unlikely to go lower according to experts, and the currently available fixed home loan interest rates are perhaps the lowest you will find in the near future. Here’s a summary of the pros and cons of taking out a fixed-rate home loan to help you make an informed decision.
The Benefits of a Fixed Rate Home Loan
- Additional savings on your home loan, as fixed rates are at an all-time low at the moment.
- Some homeowners might find it easier to plan their finances with a fixed rate home loan as there’s no change in the repayment amount during the fixed period.
- Any rise in the variable rates during the fixed period does not affect you as you will continue to be on a lower interest rate with low monthly repayments.
The Disadvantages of a Fixed Rate Home Loan
- Fixed-rate mortgage loans usually have limited features. Unlike variable home loans, they do not offer a 100 per cent offset account. There might also be a small limit or fee for making additional repayments during the fixed period.
- As your interest rate reverts to the variable rate at the end of the fixed period, it might become difficult to manage the repayments initially, especially if the ongoing variable rate is higher than the fixed rate you were paying.
- Refinancing your home loan during the fixed period or closing the loan in the case of the sale usually attracts break costs, which can disrupt your financial planning.
Eventually, choosing between a fixed rate home loan and a variable rate home loan depends on your requirements and circumstances. A variable rate mortgage is better in terms of the additional features that may help you pay down the loan faster. However, fixing your home loan at the ongoing fixed interest rate of less than 2 per cent per annum is a lucrative option that can significantly boost your savings. There’s also the option of going for a split rate mortgage. Here, you can fix a portion of your home loan and keep paying a variable interest rate on the remainder of the loan.
Are You Looking for Expert Advice?
At Wealthy You, we make it simpler to refinance your home. If you are considering a fixed rate home loan to take advantage of the low-interest rates available currently, you can rely on us for professional advice and handholding to access the financial solutions you need to achieve your goals.
If you are considering refinancing your mortgage in these challenging times, visit our refinancing page to learn more about our service or call us directly (02) 7900-3288 to have a confidential discussion regarding your home loan. We will do our best to help you take advantage of the ongoing low-interest rates through our prompt and meticulous service.