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Is now a good time to lock in a fixed rate?

fixed-rate home loan

With interest rates at record low levels, we’re going to look at a question that many of you are asking: ‘Should I lock in a fixed rate home loan?’

If you’ve read any of our blog posts lately, you would know that fixed rates are very attractive right now. Following the RBA’s emergency rate cut in March, lenders slashed their 1, 2 & 3 year fixed rate offerings. Lenders are competing with each another to lock-in borrowers right now and one of the ways they’re doing this is via fixed rates.

Locking in a low fixed interest rate can be an appealing option to gain peace of mind with certainty in your repayments. Whilst fixing your loan is a great option for many borrowers right now due to the competitive fixed rates available, there may be potential downsides to locking in your borrowings. We can help weigh up the pros and cons for you personally, as well as suggest strategies to help you mitigate any downsides to a fixed rate loan. Not sure what we mean by this? Then keep reading…

 

You lock in a good rate, but the lender locks you in too.

Lenders don’t promote fixed-rate home loans as an act of goodwill; they have a product to sell (i.e. money to lend) and profit margins to strive for. Fixed rate loans are a way for lenders to lock in some of their loan book to guarantee margins for a period of time. It’s important to remember that when you fix your loan for 3 years, not only are you locking in a specific rate for 3 years, but the lender is locking you in as a borrower for the same 3 years. If you’re not planning to upgrade or downsize your home within that time, this isn’t a big deal. But if you are considering selling (or not certain of your plans), it’s something you want to consider.

The ideal scenario is where you can take advantage of the lender’s offering (i.e. the low fixed rate) without actually giving up anything (i.e. you weren’t planning to alter your loan anyway). The way to achieve this is to ensure you select the rate and the fixed rate period that best suits you.

 

The lack of flexibility of a fixed rate loan means you may need to build in flexibility to your overall loan structure

The main benefit of locking in to a fixed rate loan is that you pay the same interest rate and same repayment for the fixed-rate period. But this can also come with a downside if you fix in all your borrowings.
Fixed rate loans generally have restrictions around redraw and the amount of additional repayments you can make during the fixed rate period. This means that if you find yourself benefiting from a pay rise, a bonus or even inheritance, depending on the terms of your fixed rate loan, you’ll likely be penalised if you try to use any of this additional cash to make additional repayments or pay down your loan balance.

If you’re not keen on forfeiting the flexibility you get with a variable rate loan but still want to benefit from the low fixed rates available, you need to think a bit strategically when setting up your overall loan structure.

By splitting your total borrowings into a variable rate loan and fixed rate loan, you can get the best of both worlds. This strategy allows you to:

  • Make significant interest savings on the fixed rate portion (there are fixed rates up to 0.60 cheaper than variable rates)
  • Maintain the flexibility to make additional repayments/ lump sum payments into your variable rate portion (helping to reduce overall interest costs)
  • Make even further interest savings by linking a 100% offset account to your variable rate loan

 

But what if I lock in a fixed rate and rates fall even further?

The cash rate is still at a record low of 0.25, and most experts believe the RBA won’t (or can’t) go any lower. Whilst we know this doesn’t necessarily stop lenders from changing variable interest rates independent of official RBA rate movements, lenders would need to drop variable rates by a significant amount before they’re as low as the current fixed rates available. The other benefit of fixed rates right now is that you don’t have to lock in for a long period of time with attractive 1, 2 and 3 year fixed rates on offer.

Need some help working out what’s going to be best for you personally?

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