The case for and against fixing your rate

You may have read this week there’s a rate war going on in the fixed home loan market. NAB joined more than half a dozen smaller lenders with fixed rates on its 1, 2, 3 and 4 year terms below 4 per cent.  RateCity predicts at least one of the other Big Four will lower their fixed rates to meet NAB.

For borrowers, it raises the question: is it time to lock in a fixed rate or can you still do better with a variable rate?

The Reserve Bank cash rate is at a record low of 1.75 per cent, with many economists predicting a further cut in August. If that cut brings us to the bottom of the cycle, the timing could be right to lock in the certainty of a fixed repayments.

However, borrowers should also consider the flexibility a variable rate may offer. Often you can make extra repayments, which can later be redrawn if needed, and your lender may reactively drop rates if the cash rate is lowered.

Here is the case for and against fixing your rate.

FOR:

Peace of mind. A fixed term loan may help you to get a sound night’s sleep. You won’t be affected by interest rate fluctuations driven by the RBA or your other factors impacting your lender.

Makes budgeting easier. A fully-fixed rate guarantees your repayments amounts for the term, which means your budget won’t need adjusting for up to five years – at least when it comes to your home loan.

AGAINST:  

Rates may be lower elsewhere. If you lock in a fixed rate, you won’t necessarily have the lowest rate on the market. If the RBA drops the cash rate, variable rates from a bunch of lenders may be reduced too, but yours won’t. This is the risk you take.

Limited opportunity to pay off your loan quicker. Variable rates come with a variety of features and often allow the lender to make extra repayments when they have capacity to do so. For borrowers with a bit of additional, be it from bonuses or diligent budgeting, a variable loan could be paid off much faster than a fixed term loan.

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