While most people will typically look to take out a variable home loan, it is first worth considering what might happen with interest rates in the future and whether that means you should think about a fixed-rate home loan.
A fixed-rate home loan simply means that the interest rate on the home loan is fixed for a certain period of time. Most fixed-rate home loans will be around two to five years.
However, there are several other factors that you need to consider apart from just the fixed interest rate.
Advantages
The main advantage of a fixed-rate home loan is that with a set interest rate, you will have a degree of certainty around your weekly and monthly repayments. If you have budget constraints, then fixing your home loan might be an option so you know where your finances stand each month.
However, if you believe interest rates will rise, it might be worth locking in a fixed-rate loan. This will ensure your repayments remain at their current level for the loan term, regardless of what happens to underlying interest rates and changes from the RBA.
Disadvantages
While having certainty around your repayments is good, one of the big disadvantages of a fixed-rate home loan is the lack of flexibility. If you take out a fixed-rate loan and want to change out of it or refinance, there will likely be higher break costs than with a simple variable loan.
Also, some features that can save you a lot of money, such as offset accounts and redraw facilities, are typically unavailable on fixed-rate home loans. While you might save money with rising rates, you could have saved even more if you’d had a superior loan product with more features.
In the current environment with record-low interest rates, numerous home loans have very attractive introductory offers. If you qualify for a home loan with an introductory rate, that might be a better option than going with a fixed-rate loan. It would be more flexible, and the net result could be similar.
Finally, it’s also worth noting that actual rates that come with fixed-rate loans often reflect where banks and lenders believe interest rates are headed. Lenders believe rates will rise if fixed-rate loans have higher interest rates than comparable variable rates. Even if you take out a fixed-rate home loan, your repayments might still be more, even if interest rates and repayments would have risen with a variable home loan.
If you like the idea of having some certainty but are still not convinced about a fixed-rate home loan, then it is possible to fix a portion of your loan. That way, you can get the best of both worlds. Be sure to contact your mortgage broker to discuss your options.