IS IT A GOOD TIME TO FIX YOUR LOAN?

The cash rate in Australia is the lowest it has been in 23 years. Is it worth looking into fixing your interest rate? Here are some points to consider when making the decision.

As of today – the RBA has kept the current cash rate at 0.25% Philip Lowe, the RBA governor, has stated that it’s unlikely that negative interest rates will be adopted in Australia but wouldn’t look to increase rates until progress was made towards full employment.

Since it took more than ten years to reach full employment after the recession in the 1990s – this low cash rate could stick around for a while.

At the moment – fixed rates are generally lower than variable across all loan types. For instance – the 2-3 year fixed rate on offer from a number of lenders is in the low 2% range.

Earlier in the year when the COVID-19 pandemic hit, the RBA made the decision to slash the cash rate to 0.25% Following this – most banks passed on cuts to fixed rate mortgages – but weren’t as generous when it came to reducing variable rates.

If you’re thinking about fixing your mortgage, here are a few factors to take into consideration.

To fix?

Since these are the lowest interest rates in Australia’s history, and the idea of negative interest rates has been ruled out, it’s unlikely the RBA is going to provide any additional/significant rate relief to homeowners. We’ve also seen (as per the last RBA rate cut) that banks are reluctant to pass on additional cuts for variable rates.

Given we’re experiencing uncertain times – and fixed rates are relatively low. The reassurance that a fixed rate provides might benefit some borrowers. Having a level of certainty when it comes to your interest rate and repayments means you can budget accordingly and not stress about your repayments increasing during the fixed term.

Or not to fix?

While fixed rates are quite low at the moment – they do come with some drawbacks.

Fixed rates aren’t as flexible as variable. Fixed rates tend to have high break costs, which are payable if you want to close down your mortgage during the fixed period (either via selling, refinancing or paying off the loan).

You generally can’t link up an offset account to a fixed loan or make unlimited extra repayments and redraw.

If future variable rate drops do occur, you wouldn’t be able to take advantage of the decrease.

It can be expensive to change lenders if your loan is fixed – meaning you could be locked in with your lender for a period of time.

A fixed/variable combo

Most lenders will allow borrowers to split their loan up into two loans – one variable and the other fixed. This provides the borrower with the best of both worlds. They can take advantage of low fixed rates which in turn provides repayment certainty over a period of time.

The variable rate provides them with flexibility – they can link up an offset account, make extra repayments at no cost and redraw extra funds they’ve paid.

At the end of the day, everyone’s circumstances are different and there is no “one size fits all” when it comes to home loans. If you’re wondering whether to fix your loan – get in touch and we’ll look into it.

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch – this is a FREE, no obligation service.

The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.