Is it too late to fix your home loan rate?

The Reserve Bank of Australia has hiked the cash rate for the first time in over a decade, so with interest rates already on the rise, is it too late to fix your home loan rate?

There are over one million Australian homeowners that have never experienced rising interest rates until now. In the 11.5 years since the last Reserve Bank of Australia (RBA) cash rate hike it had plummeted to a record low of 0.10% after years of cuts, only to be hiked in May to 0.35%.

It’s fair to assume that this initial rate hike in May 2022 will not be the last. In fact, three of the four big four banks now forecast that the cash rate could climb above 2% by 2023-2024.

The latest big four bank cash rate forecasts:

• CBA: 1.60% by February 2023
• Westpac: 2.25% by May 2023
• NAB: 2.60% by August 2024
• ANZ: 2.25% by May 2023

For an entire generation of homeowners that have never lived through a cash rate hike, you may be wondering if you’ve missed the boat to fix your home loan interest rate.

To fix or not to fix post-rate hike

One popular option that homeowners turn to to avoid the volatility of changing interest rates is to lock in an interest rate for a fixed period. Fixed rate home loans offer homeowners the stability of knowing your interest rates will not change throughout the fixed period, typically 1-5 years.

If you’ve been repaying your home loan for several years, you may be in a healthy financial position to consider refinancing. If so, you could consider switching from your variable rate home loan to a fixed rate option.

However, homeowners need to keep in mind that fixed interest rates have been rising for some time now. Last month, Westpac hiked its fixed rates six times in 2022, and NAB and ANZ hiked fixed rates for the fourth time since the start of the year. CommBank also hiked interest rates for the fourth time since 2022 last month, increasing fixed rates by up to 90 basis points in some instances.

So, would you be better off by fixing interest rates today to protect your budget from the forecast rate hikes? RateCity crunched the numbers to discover just what the impact of this scenario would look like on a $500,000, 25-year home loan.

Assuming that NAB’s prediction of multiple rate hikes bringing the cash rate to 2.60% by August 2024 comes true, a homeowner paying the average variable owner-occupier rate of 2.89% may see their interest rate rise to 5.39%.

If the same homeowner today switched to the current lowest two-year fixed rate of 2.45%, they could hypothetically save $13,694 in interest repayments in this time by fixing today.

Or, If the homeowner today refinanced to the current average fixed two-year interest rate from the big four banks of 3.87%, they may save just $3.079 interest repayments by fixing today.

Impact of switching to a fixed rate today

Note: Average rates based on RBA figures. Rate hikes based on NAB forecast of cash rate at 2.60% by August 2024. Factors in fees and rate hikes. Source: RBA.gov.au RateCity.com.au, data accurate as of 16/05/22.

What this hypothetical may indicate for some homeowners is that prioritising a competitive interest rate may help them save interest in the long run. Even switching from the current average variable interest rate today to the lowest variable interest rate may save you $9,298 in interest charges when factoring hypothetical rate hikes.

Homeowners may want to keep in mind that regardless of the choice they make between fixing or not fixing, once this fixed period ends their rate may revert to the lender’s current standard variable rate. This is typically higher than the fixed rate you lock in years prior, especially in an environment where rate hikes are forecast.

Is it too late to fix a home loan rate?

So, is it too late to switch to a fixed rate home loan? No - but the interest you could save will depend on your financial situation and home loan goals.

While fixed rates have been on the rise for many months, you may still be able to lock in a lower rate home loan today to avoid some of the impacts of rate hikes over the next few years, as per the calculations above. But the total interest you could save will depend on your current interest rate, the lender you choose and the new interest rate offered to you.

If your financial situation has improved over the last few years and your credit score or income has grown, or if you’ve built up more equity in the property, you may be in a competitive position to refinance. Lender’s typically favour refinancers that have excellent credit scores as well as loan-to-value ratios of 80% or less, so you may be more likely to gain approval for a home loan with a lower rate nowadays.

Reducing the interest charged on your home loan – regardless of whether you opt for a fixed rate or variable rate home loan – may help keep your mortgage repayments down over the next few years.

Homeowners may want to keep in mind that there is more to a home loan than the interest rate offered, even in an environment of rising rates. Variable home loans are generally more likely to offer features, like an offset account or a redraw facility, which are two alternative options that help homeowners to reduce their mortgage repayments.

Be sure to compare all the features and fees associated with a home loan before signing on the dotted line.

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