We weigh into the fixed versus variable debate here – but it’s useful to first take a step back and ask: what is a fixed-rate home loan?
What is a fixed rate home loan?
A fixed rate home loan means your loan repayments will be charged at the same interest rate for however long the fixed rate period is. This rate is commonly for a period between 1 – 5 years, but longer fixed rate terms do exist. After this period, the rate will revert to a variable rate, unless you enter into another fixed-term contract.
While historically variable rate loans have been more popular in Australia, fixed-rate loans have become increasingly popular with the fall in official cash rate.
How do banks calculate fixed home loan rates?
In theory, fixed-rate home loans have priced any predicted short/medium-term rises and falls in the official cash rate into their fixed interest rate. As such, when banks are expecting future falls in the official cash rate, their fixed rate loan offerings may be priced more cheaply than their variable rates. On the other hand, when institutions are expecting a lift in economic conditions (and hence the official cash rate), their fixed-rate loan pricing will likely reflect this outlook.
At time of writing, average fixed rate home loans on Canstar’s database, across most fixed terms, are priced at a lower rate than the average standard variable rate. This may indicate that our financial institutions are probably expecting a further cut in the official cash rate in the near to medium term.
Should I fix my home loan?
Whether you should think about fixing your home loan or leaving it variable is a question that depends on your own personal circumstances. There are, though, some general pros and cons to consider, including:
|Cashflow certainty: you’ll know exactly how much your loan repayment will be over the fixed term period.|
|Locking in a low rate: protection against any rises|
|Inflexible: if you need to break your contract it can be expensive|
|You’ll miss out on the benefits of any interest rate decreases over the timeframe of your fixed term.|
Locking in the interest rate on your home loan provides certainty in terms of your monthly repayment. This can make budgeting much easier, particularly in the first few years of home ownership. Your fixed rate will protect you in the short term against any increases in the official cash rate.
On the flip side, a potential disadvantage of fixed rate loans is that if interest rates fall, your ability to realise those savings will be delayed.
Another disadvantage of a fixed rate home loan is inflexibility. If you wish to end your fixed contract (perhaps due to selling your property and moving) you may have to pay a break fee. Depending on interest rate movements in the time since you started your contract, this could be expensive.
If you’re considering a fixed rate home loan, be sure to do your research and thoroughly compare fixed and variable rate loans before making a decision.
Looking for low home loan rate? You’ll be in a good negotiating position if…
|You know you won’t need to break the fixed term contract (if choosing a fixed home loan)|
|You have at least 20% equity in your home|
|You’re a new customer to the financial institution you’re bargaining with|
|You know what rates are on offer elsewhere|
Overall, Australia’s cash rate is at an historic low of 1.5% – and even though most banks haven’t passed on the full cash rate cut to borrowers since August 2016, there are plenty of super-low home loans rates on offer – including in the fixed-rate space!
A lot of people focus on what banks do with their variable rate home loans when there’s a cash rate cut, but it’s also worth looking at what fixed rates are doing – and that’s been very interesting this month.
Because while most of the banks that passed on a variable rate cut passed on between 10 – 14 basis points, quite a number of the banks that cut fixed rate loans cut by not just the full cash rate cut, but by more than twice that amount.
What that means is that there are now a large number of fixed-rate home loans at historically-low rates. At rates that we could only dream about in the past. You can now find advertised home loan rates of less than 4% p.a. right across all loan terms – right up to 5 years fixed.