To Fix Your Interest Rate or Not to Fix

A fixed rate home loan means your loan repayments will be charged at the same interest rate for a given period, generally this time frame is 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. If you are considering your own personal circumstances and if you should fix your interest rate or not to fix? Consider these tips before you lock in your rate:

Will your standard of living be impaired by fluctuating rate prices?

If future interest rate increases will put pressure on your household budget, then you need to manage this downside risk and therefore fixing your interest rates is maybe more important for you.

Will you be needing to access equity in the property within the next five years?

Fixing your loan essentially locks you into a lender for the fixed rate period (exit fees generally make switching undesirable). Locking yourself into one lender might not give you the opportunity to maximise your borrowing capacity and therefore might prohibit you from accessing (and using) the equity in your property. If you are uncertain about needing to access your equity over a longer period entering into a shorter term fixed period maybe better for you.

Do you plan to sell the property?

As mentioned previously, exiting a fixed interest rate loan before the period is commenced will lead to a real hit to your hip pocket. If you plan to sell the property, then don’t fix as you could be up for exorbitant fees if you sell during a fixed rate period.

If you do plan to fix start with your personal home loan before investment properties

The cash flow impact of interest rate rises on your home loan will be more significant than an investment loan because of the tax deduction you receive for investment debt.

Fix for a minimum three years and at maximum five years

Fixing for two years or less provides limited interest rate protection. The interest rates for shorter periods can, at times, seem attractive but if the purpose of fixing is to manage your risk (and it should be), then two years doesn’t provide much protection. Very few Australian’s fix for longer than five years as the rates are rarely attractive (because of the lack of demand) and the period is just too long and you forgo too much flexibility.

It is also important to note, when you fix your interest rate you receive the prevailing fixed rate at the date of settlement, not the date of application. If fixed rates change between when you apply for a loan and when the loan is actually established, you will get a slightly different rate unless you pay a fixed rate lock fee at the time you apply.

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