Should you fix your home loan?

Should I fix or float my home loan? That’s a question you may ask yourself, but what’s the answer? For one thing, it can be largely tied up in what the Reserve Bank of Australia (RBA) has set the official cash rate at — and what it plans to do with it in the future.

Earlier this month, the RBA announced it would retain the cash rate at 2.5 percent.

“Borrowing costs are set to remain at or close to record lows for some time to come. Super low interest rates have unleashed substantial pent-up demand for new housing to the benefit of many parts of Australia’s domestic economy beyond residential construction,” exclaimed Housing Industry Association chief economist Harley Dale.

The appeal of fixed-rate loans

A fixed-rate home loan has a consistent interest rate for a specified period of the loan  — hence the name. Typically, lenders offer fixed- and variable-rate loans, as well as split loans, which have a proportion of the loan on a fixed rate and a portion on a variable rate.

If the cash rate increases, you’ll be protected against interest rate rises. Any loan with a variable component can fluctuate. Interest rates are currently low, with Dale suggesting they’ll stay that way for some time.

It may pay to keep up to date with what commentators are saying. Once there are suggestions of a lift in the cash rate, it may well be a smart idea to refinance your home loan and lock in a specific rate. For now, you may prefer to stick with a variable rate loan and make the most of the additional features that usually come with such financial products. Remember — careful consideration of all possible options is key to any financial decision.

The budgeting benefit

There’s another plus to fixed-rate loans, beyond the ability to protect yourself against an increase in the cash rate.

If you find yourself pulling out your credit card on a whim or dipping into your savings account when you shouldn’t, it might be worth taking a look at your finances. Budgeting isn’t everyone’s strong point, but a fixed-rate loan can go some way to helping you out.

Given that the interest rates are fixed, your weekly, fortnightly or monthly repayments are predetermined for the specified period. This gives you certainty regarding your payments, making it a little easier to organise your household spending from week to week.

The downsides of fixing

There are many benefits to fixing your home loan, but you should be aware of some of the downfalls.

For instance, if you’re keen on having a line of credit or redraw facility, you may be better opting for a variable-rate loan, as some fixed rate home loans won’t allow these features.

While variable-rate (or “floating”) loans have a degree of uncertainty regarding rates over time, they often come packed with favourable features, which can be useful if you want to fund home renovations or reduce your interest repayments by utilising your pre-existing savings.

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