Is now the best time to lock in a fixed home loan rate?
With rates now at an all-time low, many of you may be wondering whether it's better to refinance your home loan to a fixed or variable rate.
Before going further, it's important to understand that the perfect choice depends on unknown future events. While we don't have crystal balls to lead the way, this doesn't stop us making educated decisions with the information at our disposal.
Refinancing to a fixed rate is arguably as attractive as it's ever been.
Historically, Australians haven't been overly keen on fixing their mortgage rate - typically between 10 and 20% of new loans settled are fixed. But a lot of people are looking for certainty right now above everything else, which has sent interest in fixed rates soaring.
RBA Governor Philip Lowe has made it clear he doesn't want to take the cash rate into negative territory, despite calls from some economists for a drop to a zero or even negative cash rate.
"Even in the unlikely scenario the cash rate dropped below zero, from where we currently are at 0.25%, it's unlikely to be a big drop," says Sally Tindall from ratecity.com.au.
"It's also unlikely banks would be in a position to pass on any future rate cuts in full."
Today, banks are offering fixed rates significantly lower than what they're offering for variable rates.
The lowest two-year fixed rate from the big four banks is 2.27%, whereas the lowest variable rate from the big four banks is 2.82%.
According to RateCity, if an average mortgage holder - that is, an owner occupier paying principal and interest with a $400,000 home loan - takes out a loan with a big four bank and opts for the lowest two-year fixed loan instead of the lowest variable loan, they would be on average $3591 better off after two years when you calculate interest and fees. This assumes the variable rate remains unchanged over that time.
However, over the longer term, consumers should be aware that the maths might not work in their favour if they don't renegotiate their loan at the end of the loan term - whether that is refixing, refinancing or negotiating a lower variable rate.
Fixing isn't for everyone.
"Fixed rate home loans are typically a lot less flexible than variable ones and if you want to get out early there can be hefty break fees attached, so it's worth thinking about what the future holds for your property before leaping in," says Tindall.
Sharon Xie from Home Loan Experts recommends a variable rate if:
- You are expecting large extra repayments on your loan;
- You plan to sell your property in a short period of time;
- You plan to refinance your home loan before the fixed term expires;
- You intend to carry out extensive renovation or knockdown and rebuild your home; or
- You have substantial savings that can sit in the offset account.
Another option is to split the mortgage into two accounts - one on a variable interest rate and the other loan amount fixed.
"While you might pay a higher interest rate on the variable portion, you can typically use an offset account and make extra repayments to bring down the balance of this part of the loan," says Tindall.
"It's usually a neat way to have a foot in both camps."
Xie agrees that a split mortgage can provide the advantages of both a fixed and variable loan.
"Let's say that you borrowed $500,000 over a 30-year term and fixed $300,000 at 3.90% per annum for three years and kept the remaining $200,000 variable at 3.59%," says Xie.
"Your fixed monthly repayments would be around $1415 and your variable repayments would be $908, bringing your total repayments to $2323 per month.
"Then, after six months, your lender increases its variable rate to 3.79% p.a., bringing your total mortgage repayments $2345, or an increase of $22 per month.
"If you were instead to keep your home loan entirely variable, your repayments would have increased from $2270 to $2327, or an extra $57 per month.
"Similarly, if the variable rate were to decrease to 3.4% p.a. on your split loan, your total repayments would decrease to $2301, saving you $22 a month."
At the end of the day, choosing between fixed and variable means doing your homework and seeking advice where necessary.
"Don't rush in, do your research, and make sure you are happy with the rate but also that you're happy with the terms and conditions that come with a fixed rate," says Tindall.