Should I “Fix” My Interest Rate?

It’s an age-old question… Should you fix your interest rate? Or take a variable rate?

That’s really a question only you can answer, but we can certainly help you reach a decision by layin’ out all the facts and figures because knowledge is power right?

In this blog, we’re going to talk about why would you fix your interest rate.

What is a fixed-rate mortgage?

It’s pretty self-explanatory, this is where you lock in a known interest rate for a certain length of time; typically from one to five years.

Why would you fix your interest rate?

Fixing your interest rate gives you some surety about the cost of your repayments which is important to some people. It means you aren’t worrying about the next interest rate rise and how you’ll find the extra cash to make those repayments.

Are there any disadvantages to fixing your interest rate?

Locking in your interest rate gives you certainty about the repayment amounts, but the rates available to you may not be as competitive as their variable rate counterparts (however this is always subject to change). Fixed-rate loans also come with a limit on how much you can pay over and above your repayments and generally don’t offer an offset account or redraw facility.

What is a variable rate mortgage?

Interest rates set by the bank are subject to fluctuation, both up and down, depending on cash rates set by the RBA, the cost of funds, the economy and a change in the wind direction (or so it might feel sometimes).

Why would you enter into a variable-rate loan?

Having a variable rate mortgage allows you to currently access a loan at a lower rate than the fixed rates, but is at the mercy of these changes; whether positive or negative. This means while you can’t be guaranteed the amount of your repayments each month, you can enjoy lower minimum repayments should the interest rates drop.

You can typically make an uncapped amount of additional repayments to have you own your home sooner and utilise a redraw facility and offset account allowing you to use your savings to offset the amount of interest you’re paying.

Are there any disadvantages to opting for a variable rate?

.By now, you’ve probably worked out that one of the greatest pitfalls of a variable-rate home loan is being subject to interest rate rises. With rates currently increasing at a rate not seen in many years, many households are scrambling to find extra money each month to meet their minimum repayments. When entering a variable rate contract, you should consider your ability to make repayments in the event of rate rises.

Is there another option?

You betcha there is!

If you’re the kind of person who likes to buy taco kits that are both hard and soft tortillas, a hybrid arrangement might be the kind of loan that suits you best.

Essentially this allows you to split your loan into two (or more) smaller portions of the loan and fix one, while the other is variable. This means you can have some surety about your payments, whilst being able to take advantage of lower interest rates, a redraw facility and an offset account.

Want to learn more?

We’d be happy to help. Book an obligation-free virtual cuppa with Lenny and explore the loan option that’s right for you.