Fixed interest rates are rates that remain fixed for a loan's entire term, regardless of what happens in the market. Knowing your repayments will remain fixed allow you to plan ahead and maintain a certain standard of living. Fixed rates can also protect you from sudden rate rises.
The downside to fixed rates is they are usually more restrictive when it comes to making additional repayments. There are very few lenders who allow for offset accounts on fixed rate loans. Fixed rates also incur substantial fees if you end up cleariing a loan earlier than expected, or if you want to refinance down the track. You do not incur these fees with variable rates. So, a rule of thumb is if you are uncertain about your financial position over a period of time - don’t fix.
Currently, fixed rates are at historic lows with two-year fixed rates starting at 2.09% and competitive variable rates sitting at around 2.7%. The reason fixed rates are lower is that they are tied to swap markets. This is where investors go to buy and sell debt securities issued by corporations or governments, which are generally longer-term.
For variable rates to match fixed rates we would need at least two further rate cuts - and the RBA has stated they have no intention at the moment to reduce the rate below 0.25%.
This leaves lenders to compete with each other and squeeze their profit margins to get more business. The question will be how much appetite they have to do this? Lots of our clients are splitting their home loans and taking a percentage variable and a percentage fixed to get the best of both worlds!
Ultimately fixing your loan doesn’t just come down to rates. Home owners should make an informed decision that weighs up all the elements relating to their personal situation.
Get in touch with us if you’d like to talk through your options.