Should you make the switch to fixed rates?

A fixed rate home loan has a set, unwavering interest rate for the entirety of the fixed-rate term, which is usually between one and five years.

At the end of the fixed-rate term, your home loan will automatically roll over to a variable rate, unless you agree with your lender to re-fix it for another designated period. If you want to continue with a fixed rate but aren’t able to with your current lender, you can try another one.

Depending on your lender, switching to a fixed rate should be fairly straightforward if you’ve got a variable loan or are in the variable portion of a split rate loan. The process usually involves approaching them about the possibility and organising the switch if you get the green light. If your lender says no, or you simply want to move to another one, then you can go to a different lender with the same request.

Interest affects how much you pay over the life of your loan, so it’s important to weigh up the pluses and minuses of changing to a fixed rate, before you make the plunge.

Set repayments

One of the main benefits of fixing your mortgage rate is that you’ll know exactly how much your repayments are over the fixed-rate period. So no matter whether you make your repayments weekly, fortnightly or monthly, there won’t be any surprises.

Security and peace of mind

The certainty of a steady interest rate can create a sense of security and peace of mind. You don’t have to worry about copping the brunt of interest rate rises, as no matter how much they go up, your rate will remain the same.

It may be easier to budget and save

Fixed rates could make it easier for you to budget and save, as you know exactly how much money you’ll have leftover after your repayments have been made. This can be particularly beneficial if you have a tight budget and any sort of extra expense could make it hard to make ends meet.

You could end up paying more interest

A potential downside of fixed rate home loans is that when interest rates drop, you’ll have to keep on paying the interest you fixed your mortgage on. This could see you paying more in interest than you would if you had a variable rate home loan.

Extra repayments may be limited

Another disadvantage of fixed rate home loans is the majority of them limit your ability to make extra repayments. Typically, fixed rate mortgages will let you make a certain number of extra repayments each year, or over the loan term, but once this limit is surpassed fees will apply for further repayments.

If you don’t want to deal with repayment limits but still want certainty over your repayments, there’s always the option of a split loan. This should enable you to keep making extra repayments into the variable loan portion as you please.

There may be fewer features

When it comes to fixed rate home loans, there are often less features up for grabs or, if they’re available, they often come at an extra cost. Therefore, you may not be able to access financial tools such as offset accounts or redraw facilities if you make the switch to a fixed rate.

If you leave a fixed rate term early you’ll have to pay for it

If you have a fixed rate mortgage and decide to leave before your term is over, then you’ll likely have to fork out costs such as break fees. Depending on the size of your loan, interest rate movements and loan term, these fees can be significant, reaching up to thousands of dollars.

Interest rates are almost impossible to predict, so your decision should ultimately come down to your personal and financial circumstances. If you’re after repayment certainty and overall peace of mind, then a fixed rate may appeal to you. If you’d prefer flexibility and are prepared to ebb and flow with the market, then you may decide to stick with a variable rate.

Here are four golden rules worth following before you make a formal decision:

• Calculate your total costs to settle your current loan and sign into another one, taking into consideration potential exit and establishment fees. Your outgoings can easily outweigh any savings gained, so take care when crunching the numbers.
• Understand the new mortgage you’re signing on for. Does it have a honeymoon rate or introductory period? What features are available (if any)? How many extra repayments can you make? Make sure you find the answers to these sorts of questions.
• Ensure they deliver accurate calculations on the term of the home loan.
• Approach your lender to negotiate for a better deal first. If they don’t come to the table, look elsewhere for someone that better matches your needs.