Is now the time to fix your home loan?

A total of 11 lenders, including several major banks, have dropped their three year fixed rates in the last fortnight to lows of 3.89 per cent.

The drop comes on the back of a suggestion from the RBA that if the cash rate were to move, it would be south, not north.

Banks typically fix their rates with the future in mind, but with mortgage rates at 60 year lows, it’s hard to imagine they will go much lower.

Sally Tindall, money editor at RateCity, said the window to fix near the bottom of the rate cycle was becoming clearer, despite the cash rate speculation.

“RateCity research shows there are 11 mortgages under 4 per cent, fixed until Christmas 2018.

“That’s a pretty good deal in anyone’s terms,” she said.

Ironically, most Aussies shy away from fixing at the bottom of the market, with many tending to ‘panic fix’ when rates are at their highest.

For example, more than 25 per cent of new loans were fixed back in March 2008 when the cash rate was at a peak at 7.25 per cent.  Compare this to a year later, when rates fell to 3 per cent, and as few as 4 per cent of new loans were fixed.

At the end of the day, selecting a variable or a fixed rate still comes down to personal choice.  If you are solely focused on cost, and history is anything to go by, the lowest variable rate is more likely to come out in your favour.

But fixing brings home owners peace of mind that protects them from the roller coaster ride variable changes can take their customers on.

“Of course, no one has a crystal ball, so you do have make that tough decision as to whether you’ll be better off on a variable rate or a fixed rate over the next three years,” she said. 

The decision can often be a line-ball one.

Tips to consider before fixing

1. Find out what the break fees are before you fix. 
2. Many banks will now let you make extra repayments during the fixed term period but often there’s a cap on them.  Find out what the limitations are because while you might not be in a position to throw extra cash on to your home loan right away, if you find yourself with money to spare later down the track its good to know whether you can put it on to your home loan.
3. Look at what the interest rate is after your fixed loan term finishes.  Make a point of diarising it well ahead of time and start talking to your bank about what the options are after it finishes. You might want to fix again or revert to a variable rate. Whatever you choose, make sure you ask your bank for a discount. 
4. Consider taking out a split loan.  Having half your loan in a variable account could give you the flexibility that some fixed loans don’t.  Plus, if rates plummet, then only half your loan is stuck in the fixed term.
5. Regardless of whether you fix or not, always factor in a buffer of at least 2 per cent, if not more. With rates at record lows right now, the changes are when your term is up, you’ll move on to a higher rate.

Related links:

• The cost of staying with a major bank
• HIgher rates for investors is a small win for owner occupiers
• Compare home loans
• Home loans calculator

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