Should I fix my home loan?

A home is likely to be one of the biggest purchases you make in your lifetime, so choosing the right home loan for your needs and circumstances is important. If the past several years of interest rate rises have given you some pause to think about your current arrangement, you may well be wondering – should I fix my home loan?

Here, we consider what it means to fix your home loan, as well as the pros and cons, and the phenomenon of the ‘fixed rate cliff’ that many Aussie borrowers currently face.

What happens when you fix a home loan?

When you sign up for a fixed rate home loan, you and your bank or lender are agreeing that your home loan interest rate will be locked in place or ‘fixed’ for a predefined period of time. This length of time, known as the fixed-rate term, will typically be between one and five years, after which, your fixed rate will end.

What this means for you as a borrower is that, throughout the entire fixed-rate term, your interest rate will remain the same, and will not fluctuate, as a variable home loan rate might. This can bring a sense of certainty, as you will know exactly how much your home loan repayments will be each month, and budget accordingly.

Should I fix my home loan in 2024?

Ultimately, there is no right or wrong answer to the question of whether it’s better to have a fixed or a variable rate. The decision as to whether to fix your home loan might ultimately come down to your personal circumstances and finances and your feelings about market conditions.

The Reserve Bank of Australia (RBA) has held the cash rate steady since the end of 2023, which means that banks and lenders have largely held their home loan variable rates in place. Prior to this, the period between 2022 and 2023 saw rates rise sharply, as the central bank attempted to bring inflation in line, and along with this, variable home loan rates became more expensive.

Economists at the big four banks are predicting that the cash rate may fall again by the end of 2024, or early 2025, but other economists outside the major banks have cautioned that cash rate hikes may not yet be behind us.

With this in mind, you may well be wondering whether it’s worthwhile to switch to the security of a fixed rate, or wait for variable rates to fall, as many have predicted they will. While it’s not possible to definitively say whether this is a suitable choice for you, an understanding of the pros and cons of locking in a fixed rate may guide your decision.

What are the pros of locking in a home loan rate?

There are several reasons why it might be worthwhile to lock in a home loan rate. These include:

• Protection from rate rises: If rates are rising, then fixing your home loan can give you a sense of certainty in knowing that your repayments will remain consistent from month to month, and you will be protected from interest rate increases for the fixed term of the loan.
• Certainty in your repayments: Knowing how much your mortgage will cost you each month can allow you to set your household budget with a greater degree of certainty, knowing you won’t be vulnerable to rising interest rates.
• Potential to save on fees and charges: Variable rate home loans come with various extras, but these can be expensive, so if you’re happy without them, you can avoid some fees with a fixed rate.

What are the cons of locking in a home loan rate?

Before locking in a home loan rate, though, there are some things to be wary of. These include:

• A lack of features: The features of a variable rate home loan can be appealing – for example, offset accounts and redraw facilities can allow you to make additional repayments on your loan, and even use your home loan account for everyday banking. Fixed rate home loans typically do not have these features, although you will need to check with your lender as they may be available in some circumstances.
• Potential to miss out on rate cuts: If interest rates fall after you lock in your home loan rate, then you will not get the benefit of this, and will continue paying your rate for the duration of your fixed term.
• Break fees: If you break out of a fixed rate home loan early, you will typically be charged break fees. These are based on a number of factors, including how much time is left on your fixed term and the balance of your home loan, and can be substantial.

Can you switch to a fixed home loan from a variable one?

Yes, if you are currently on a fixed rate home loan and you want to switch to a variable rate one, you can do this, through a process known as refinancing. Refinancing a home loan is a process through which you swap from one home loan to a different one, either with the same bank or lender, or with a new one.

There are a number of reasons you might choose to refinance – if your variable rate is rising, you may decide that you want the security of a fixed rate, where your repayments will remain the same for month to month. It may even be that if you have been on your existing home loan for a while, you feel that there is a better deal out there.

What does it cost to refinance a home loan?

If you do decide to refinance your home loan, then it is important to be aware that there will be some costs attached. According to Canstar finance expert Effie Zahos, the cost of refinancing a home loan could be anywhere from $75 to $2,108 in fees, with the average cost sitting at $807.

This amount could take in a variety of different fees, including discharge fees, application fees and valuation fees. If you are refinancing from one fixed rate home loan to another before your fixed rate expires, then it is also possible that you may have to pay break fees, which could potentially be costly.

What happens when a fixed home loan term ends?

If your fixed rate home loan term is about to expire, you may well be wondering – should I fix my home loan once again? When your fixed home loan term is ending, you have a number of possible options open to you. You might choose to:

• Allow your home loan to revert to the variable rate offered by your lender when your fixed rate ends.
• Refinance to a new fixed rate with your current lender or a new lender.
• Refinance to a new variable rate with your current lender or a new lender.

When your fixed rate ends, you may find that your options for home loan interest rates are more expensive than they were when you took the loan out. Many Australian fixed rate borrowers currently face this prospect, in a phenomenon that has been called the ‘fixed rate cliff’.

What is the fixed rate cliff?

When your fixed rate term expires, your home loan will either revert to a variable rate, or you will need to lock in a new fixed rate. Whatever the case, if you locked in your home loan when rates were cheap, and your fixed rate ends at a point when rates have gone up significantly, you may suddenly find yourself facing much more expensive mortgage repayments, a phenomenon that some call the fixed rate cliff.

In November of 2020, the Reserve Bank of Australia (RBA) set the cash rate at a record low point of 0.10%, in an attempt to mitigate the economic effects of the COVID-19 pandemic. This enabled banks and lenders to offer low home loan interest rates, with many borrowers taking advantage by purchasing houses or refinancing and locking in low fixed rates, and banks lending $394 billion to mortgage borrowers in the 2020-2021 period.

Former RBA governor Philp Lowe assured borrowers that rates would not rise again until 2024, but this was not the case. In fact, the RBA began raising rates again in early 2022, two years earlier than anticipated. This means that those who locked in five-year fixed rates in the 2020-2021 period may soon be coming off these rates and entering an environment of much higher repayments.

Could 2024 be a good time to refinance your home loan?

If you are coming off a fixed rate loan in 2024 or 2025 and need to refinance to a new one, you may be thinking about refinancing to a fixed rate that’s lower than current variable rates. To give you an idea of what’s currently out there on the market, Canstar keeps track of the average fixed and variable home loan interest rates from lenders on our database. You may find a bank or lender willing to offer you a deal, a discount or refinance cashback to secure your business. You may even be able to negotiate a discount with your existing lender, provided you meet their criteria in relation to loan size and loan-to-value ratio (LVR).

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