Is it time to lock in a short-term fixed rate?
With one and two-year fixed home loan rates currently in line with variable rates, it appears that with inflation riding high and more interest hikes on the horizon, homeowners could lock into a short-term fixed rate to ride out the stormy times.
September has seen the Reserve Bank of Australia (RBA) jack up interest rates by another 0.5%.
It’s the fifth consecutive rate hike since May. In total, variable rate borrowers have seen their rates rise by 2.25 percentage points since May, taking the average existing variable owner-occupier to an estimated rate of over 5%. But the rate pain is not over yet with the Reserve Bank of Australia promising more increases.
However, it’s not all doom and gloom, and for those prepared to shop around, there are opportunities to trim their monthly mortgage bill, such as locking into a competitive fixed-rate loan.
What is a fixed-rate home loan?
A fixed interest rate home loan is where you lock in (or ‘fix’) your interest rate for a set period (usually between one and five years), which provides borrowers with cash-flow certainty.
By knowing precisely what your repayments will be, you’ll be able to plan and budget for the future. Better still, some fixed-rate products will allow a limited additional repayments without penalty. Still, if you plan to make extra repayments to your fixed-rate loan, it is essential to understand the limits first.
What are the disadvantages of fixed interest rates?
The assurance attached to a fixed home loan allows you to set an accurate budget. However, the rigid nature of a fixed home loan creates some challenges.
A fixed rate mortgage provides you with a strong sense of certainty, even when the economy is going through tough times, but it also offers little in the way of choice and freedom.
Another downside is your rate is locked up for a longer time, and then if interest rates start dropping, you might be paying more interest than homeowners with variable interest rates. However, rate cuts don’t appear to be on the short-term horizon at this stage.
The penalties for making additional repayments beyond the allowed limit can be harsh if you unknowingly make more repayments than is permitted. Fixed-rate mortgages usually don’t offer bells and whistles like a redraw facility or offset sub-accounts.
In addition, if you adjust your loan or sell your home within your fixed term, you may also have to pay break fees, often thousands of dollars.
Fixed rates in focus
Only ten lenders are expected to offer variable rates under 4% once all the September 2022 hikes take effect. If you want a bit more certainty, there are a handful of one-year fixed-rate mortgages available, offering comparison rates below 4.50% for those interested in refinancing.
With all these factors in mind, now could be a great time to lock into a short-term (1-2 year) fixed rate to mitigate the impacts of higher inflation and interest rates.
If you would like to find out more about fixed-rate loans, call AAP Finance today on 1300 141 453.