Fixing Home Loan Interest Rate-Is it worth it?
While you are paying off your home loan you should always be sure to review your home loan every once and a while to make sure that your home loan is working the way you would like it to. By reviewing your home loan you may find that you will identify other loans that you may be more suited to and you may even find loans that will save you money. Another benefit of reviewing your home loans is that you may be able to identify the right time to fix the interest rate on the loan. If you are looking at fixing the interest rate you will be thinking that the interest rates will be rising in the near future and you will be able to save money by locking in the rate. However, fixing the interest rate is risky and it can be hard to tell when the right time is to fix. Many people will find themselves asking whether fixing your rate is worth it?
What do the Interest Rates Currently Look Like
Before you should even consider fixing your interest rate you should look at the current interest rates that are on offer. The interest rates that are on offer are:
- Margin between official cash rate and the standard variable rate. When looking at the interest rates the difference between the official cash rate and the variable rate that is on offer is a good indication of how the banks are travelling. At the moment the margin between the official rate and the variable rate is quit high and that shows that the banks are trying to make a bit more money.
- Attractive fixed rate offers. While the gap between the official rate and the variable rates is getting bigger the fixed rates that are offered by lenders are not following the same trend. The fixed rate that is offered by many providers is now getting closer and closer. Generally, if the fixed and the variable rate are close then fixing your interest rates carries less risk. There is less risk involved in fixing when the fixed rates are closer to the variable rates because fewer rate rises are need for you to start saving money.
How the Economic Outlook will Affect Interest Rates
When you are considering whether to fix your interest rate you should have a detailed knowledge of what will affect interest rates. When you fix an interest rate you will initially have a higher rate compared to the variable rates. However, you will be looking to save money which will occur when the interest rates rise above what you have fixed. By knowing what affects interest rates you will be able to make a more informed decision on whether to fix or not. The interest rates are usually governed by:
- What factors will affect the interest rate. There will be a variety of factors that will affect if the interest rates are raised or lowered. The main factors that will influence interest rates will be the unemployment rate, inflation and retail sales. When the economy is expected to improve unemployment will go down and people will spend more money. If this happens for a sustained period then the interest rates will rise.
- Reserve bank of Australia. The Reserve Bank of Australia is the body that controls the official interest rate. The Reserve Bank will meet on the first Tuesday of every month and have a look at the economy and decide whether interest rates will need to be raised to slow down the economy. In the end it is up to the lenders if they would like to raise the rates but generally if the Reserve Banks changes their rates then the providers will follow suit.
What are some Questions you Should be Asking
Now that you know about interest rates and what controls them you will need to know about fixed rates and whether you should be fixing your loan. Predicting what the interest rates will do is tricky so by asking yourself some questions about your loan you may be able to identify whether you should fix the interest rate or not. If you are considering fixing your interest rate then you should ask the following questions:
- What do you think interest rates will do. You can listen to as many experts as you want but generally you will have a decent idea about what the interest rates are going to do in the near future. If you think the interest rates will rise enough in the near future then you should consider fixing your interest rate.
- What is the maximum variable rate you will be able to pay. Some people will choose to go on a fixed rate because they are on a fixed income and they will not be able to make their repayments if the rates rise. If this is the case then you should strongly consider fixing the interest rates if the rates look like they will rise and you can’t afford it.
- What are your short term goals with your home loan. Generally lenders will only allow you to fix the interest rate of a loan for a short period of time. Fortunately some of the best deals on fixed rates can be found when fixing your loan for around 3 years. If you are in a situation where you would like to budget and have a bit of consistency with your loan then you should look at fixing.
- What is the difference between the fixed and variable rates. The difference between the fixed and variable rates is a very important factor to consider. If the variable interest rates are a lot lower than the fixed rates then you should not fix. If they are a lot lower then they will need more rate rises during the fixed rate period to be sure that you will save money. At the moment the fixed rates are only around 2 rate rises away from the variable rates so they are close and it could be worthwhile fixing your interest rate.
- What home loans suit you. Different home loans will suit different people. Some people will like the stability and security that is offered with the fixed rate loans. If you like these features of the loans and the other features are important to you then you may want to look at fixing your home loan.
- Flexibility. Flexibility is one of the major issues with fixed rate loans. The fixed rate loans will have little flexibility and will not offer features such as the ability to make additional repayments and redraw facilities. If you are a person that would take advantage of these types of flexible facilities then you should avoid fixed rate loans.
- What interest rates are available. If you are looking at fixing the interest rate of you r loan then you should simply have a look at what rates are available. If you find a fixed rate that is close to what you are paying on a variable then you should jump at the opportunity if you believe the rates will rise enough.
- Special offers. While saving money is the key to changing to a fixed rate you also shouldn’t ignore what special offers are available. If there is a fixed rate loan that offers a discount of some description then this may sweeten the deal and it may be more beneficial to switch to a fixed rate.
Features of a Fixed Rate Loan
The fixed rate loans have a variety of features that will make them stand out from other loans. The features of a fixed rate loan are:
- Fixed interest rate. The main feature of the fixed rate loan is the ability to lock in an interest rate from the start of the loan. The interest rate that will be offered with the fixed rate loan will generally be a bit more expensive than the variable rate loan but you will be banking on the interest rates rising soon. If the interest rates rise above what you are paying then you will start saving money.
- Few features. While the fixed rate loans are great because they offer you the stability of the repayments over time they will generally be less flexible than other loan. With fixed rate loans you may not be able to make additional repayments on the loan with incurring extra fees and you will not be offered any special features like redraw facilities.
- High exit fees. If you are looking to apply for a fixed rate loan you should be sure that you want to get one. The fixed rate home loans will generally come with very high exit fees. With high exit fees it means that if you would like to change loans it will cost you a lot of money. Therefore, if the interest rates don’t rise then you will be stuck with the loan until the fixed rate term ends.
Split the Loan
Most people will look to fix their home loan at least once over the course of the loan but do to the risks involved with fixing few people will actually take the plunge. However, there are other options available to people who are looking for a bit of stability and the chance to save money that aren’t as risky as fixing the entire loan amount. Split rate loans allow people to get the best of both worlds by offering them the ability to hedge their bets and have both interest rates. The split rate loans allow you to have:
- Fixed and variable. Most people will use the split loan to get a loan that has half the money owing on a fixed rate and the other half on a variable rate. This is a great way to get the best of both worlds when you are paying off a loan. By splitting the loan you will be able to take advantage of the times when interest rates are low and be protected when the interest rates are high.
- Advantages. The split rate loans have many advantages. First, you will be able to save money when the interest rates are lowered while still being protected when they rise. This means that you get the flexibility while still having the stability. Furthermore, the variable rate loans often come with a variety of features that will help you save money and pay off your loan faster. By splitting the loan you will still be able to take advantage of these features.
- Disadvantages. While there are many advantages of the split rate loan they do come with their disadvantages. If the interest rates were lowered then you would find that you will not get all the benefits that you would receive when simply on a variable rate loan. Conversely, if the interest rates rise then you will not save as much money as you would if the entire loan is also fixed. Furthermore, as part of the loan is fixed the exit fees will be quite large. This means that if you were to move or that you were looking to refinance then you would have to pay a lot of money to break the fixed rate portion of the contract.
Benefits of Variable Rate Home Loans
When looking to see if you should fix your interest rate it is essential that you compare the fixed rate loans with the other type of interest rates. Variable rate loans are the most popular type of loans that are available. The variable rate loans offer great packages and if you enjoy the features that are offered with the variable rate loans then you not be looking for a fixed rate loan. The variable rate loans that are on offer are:
- Basic variable. The basic variable loans that are offered by most providers will be the cheapest loans that you will be able to find at any given time. The basic variable loans will offer people a low interest rate loan with few fees and features. While they will be cheap they are generally for the people who are looking to pay the lowest rate and not any more.
- Standard variable. The standard variable loans are by far the most common loans in Australia. The standard variable loans will offer you a low interest rate loan and additional features that will help you save money. The additional features that may come with the variable rate loans are the ability to make additional repayments when you can and the ability to redraw the funds at any time. The other features that may be offered with some standard variable loans are offset accounts and introductory interest rates.
- Package loans. The package loans are type of variable rate loans that are offered by some providers. Generally the package loans will offer you a standard variable loan plus additional features. You may only have to pay a bit more in your fees and you will receive a discounted interest rate, credit cards, transaction accounts and other features on your loan for free. Some of these types of packages may have eligibility criteria but generally if you think you will save money from the interest rates and accounts that are offered with the package deals then you should take them up.
The Cost of Fixed Rate Loans
If you are looking to switch to a fixed rate loan then you will need to know the cost of the loans. All loans will end up costing you different amounts and this can be affected by a variety of factors. However, with fixed rate loans the cost doesn’t change the only thing that will change is the surrounding factors and other loans. So generally the fixed rate loans will cost you the same amount of money but will they save you money or cost you money? When you are looking to fix your interest rate then you should look at:
- How will interest rates go. When you are looking at whether to fix a home loan or not the main thing that you should be looking at is how the interest rates will look like in the future. The interest rates can change very quickly and a few rate rises can occur in a very short time. If you fix before these rises then you will stand to save some money. If you believe that the interest rates will rise in the future then maybe you should fix your interest rate. However, be sure that you believe they will rise fast enough so you can enjoy a long period of saving money on a lower rate. If they rise slowly you may only save money in the last portion of the loan and end up losing money overall by choosing the fixed rate.
- What if they don’t rise. If the interest rates do not rise when you are on a fixed rate loan then there will be little that you will be able to do about it until the fixed rate period expires. If you are on a fixed rate loan then you will find that the exit costs are quite high and the cost of refinancing will outweigh the gains that you will get from the savings on the new loan. Furthermore, by the time you have figured out that the interest rates look unlikely to rise you will generally be a fair way into your fixed rate term. Most providers will only be offering 5 year fixed rate loans at the most and the chances are that you will only have a year or two left on the fixed rate before you revert to the variable rate. This is one of the risks that come with fixed rate loans. If you are on a fixed rate loan then you will find that you will have to stick it out and see where it will take you.
- No flexibility. While fixed rate loans have many advantages one of the disadvantages of fixed rate loans is that they lack the ability to be flexible. Many features that can be added to loans that will give you more flexibility. For example, if you are on a variable rate loan you will be able to make additional repayments onto your loan and redraw them at any time for no cost. However, with fixed rate loan you will be charged a fee to make additional repayments and charged a fee to redraw the funds. The ability to make additional repayments should not be underestimated. If you pay an extra $1000 a year onto your loan then the money that you will save from that thousand over the course of the loan will be very high when you consider the amount of interest that would have accumulated on the money. Flexibility allows you to pay off the loan the way you would like. If you do not like a restrictive loan then you should not be looking at a fixed rate loan.
When looking for a loan you will have to decide what type of loan you would like to go with. One of the first decisions that you will have to make when you are looking for a loan is whether you would like to get a fixed or a variable interest rate loan. If you are looking to get a fixed rate loan then you will have to know whether fixing your rate is worth it. Generally, people will be looking to fix their interest rate if they see the interest rates rising in the near future and if they are on a tight budget and will not be able to afford the rate rise. If you are thinking about fixing your interest rate then you should be sure that it is the best thing for you. Fixed rate loan have high exit fees and once you are locked into a contract it will be very hard to get out of them.
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- 30 Year Fixed Rate Home Loan
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- NAB Tailored Home Loan – Fixed Rate (Interest Only in advance)
- Commonwealth Bank Interest In Advance Fixed Rate Investment Home Loan
- Fixed Versus Variable Rate – Which one to Choose?
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