All this talk of looming interest rate rises means it’s also a good time to talk about whether or not you should fix your interest rate. No need to sift through the home loan jargon and make hasty decisions. We’ll talk you through the pros and cons in a simple way, so you can make an informed decision about what suits you best.
What’s happening in the market: a cheat sheet.
Interest rates have been at 60-year lows for some time now. And last week, when the Reserve Bank of Australia (RBA) had their monthly get together to chat about how the Aussie economy is going and whether they should shift the cash rate, they decided to leave it on hold at 1.5%. Yippee! That means the RBA is keeping the rate low to encourage Australians to spend more cash, which means our variable rates on our home loans are likely to stay the same. Which also means we won’t need to fork out more money for our monthly repayments. Phew.
But it’s only a matter of time. Even though we’ve been used to sub 3% cash rates (not to be confused with the interest rate set by your lender) for some time now, the average cash rate over the last 20 years is 5.2%, and only fell in the wake of the global financial crisis ten years ago. So, we shouldn’t be surprised by a rise. All the experts, including Australia’s loveable shoeless finance guru Scott Pape, says 2018 will be the year that rates rise again.
Pros of fixing.
Lenders are offering some pretty hot fixed rates at the moment, which means you can secure an interest rate for a fixed amount of time, even if the cash rate does rise. This means if you secure a low fixed rate before the rise, you’ll save money on repayments while your mates on variable rates experience a rate jump. Plus, you’ll also have the security of knowing your repayments won’t change for that fixed period, which makes budgeting easier.
It does mean you’ll pay a little bit more now, as fixed rates are generally higher than variable rates, but you'll have repayment certainty at a time when the variable rates may rise. Think of it like an insurance premium – you’re paying for protection, which in this case, is protection against rising interest rates.
Check out Tic:Toc’s fixed rates for live-in and investment loans.
Cons of fixing.
Before you rush to fix your home loan, there are some things you need to be aware of about fixed rate home loans.
Firstly, they have less flexibility, including large break costs for breaking your contract before the fixed period ends. If you’re planning to move house soon or not sure what the short-term future holds, it may be best to stay with a variable rate.
If paying your home loan off quickly is a priority to you, switching to a fixed loan may not be the right move for you either. You are typically capped on the amount of additional repayments you can make to reduce your loan balance, and can be charged fees if you do. With variable loans, you can make as many additional repayments as you like, which means a shorter loan term and less interest paid.
Having said that, a great (and rare) feature of Tic:Toc’s fixed rate home loan, is you can opt to have an offset account attached to your home loan for $10 month. This means you can reduce the amount of interest you pay (and your loan term) by keeping your savings in this account, without getting penalised by paying down too much of your principal loan balance. In other words, you’re getting the security of the fixed loan, as well as the flexibility of being able to reduce your loan term and redraw via an offset account. Yahoo!
One final potential con to think about? Interest rates may actually stay the same for a while longer, because we’re not fortune tellers. And you may end up paying more on your fixed rate.
Whether or not you decide to fix or not, you should still consider refinancing to make sure you have a good deal on your existing home loan rate. Because if rates do go up, at least they’ll go up from a lower base. While refinancing your loan is normally a pain in the a – seriously, it doesn’t have to be. Tic:Toc has a fully online application and approval process, that cuts out the time and complication. And cost. Which means it's possible to get your loan docs delivered on the same day you apply. Win, win.
Applying for a Tic:Toc loan.
Ready to get going? Let’s go. We’ll ask you some questions and provide you with loan options we think will suit you best – whether that be fixed or variable. But the decision will be all yours.