Interest rates remain at historical lows, but the question is for how long? Market commentators have been forecasting that the next move in rates is up, but is it really worth you locking in your home loan rate? We take a look.
Month-on-month, the RBA has kept on setting records by keeping the official Cash Rate steady, at 1.5%. You have to go back 22 years to find a period of such inactivity in the policy setting. All in all, variable interest rates haven’t been this low since the late 1950s.
Since 2008 the trend for rates has been lower, as depicted in the graph below.
The RBA, however, has signalled that the next move in rates would most likely be up than down (subject to economic conditions of course) therefore, is it worthwhile considering the pros and cons of locking in your home loan rate, and what’s required to change a loan from a variable to a fixed rate loan?
The Benefits of fixing your loan
If rates do rise your interest rate remains the same (for the fixed term that you’ve selected) vs. a variable rate, which will move immediately to any changes in the official rate policy or moves made by banks. Also, with fixed rates your repayments don’t change allowing you to better budget over a certain period of time, this can be particularly helpful to families.
That certainty comes with potential trades offs though- these include:
Potential limitations of locking in your rate
Change of Loan fees – depending on your home loan package, moving from a variable only to a fixed rate loan can result in re-financing costs or “break” costs. Therefore, your potential term gain, could be eroded by fees.
Reduction of features – by nature variable rate loan products are more flexible, giving users’ flexibility when it comes to offset accounts, repayment schedules and add-on services i.e. credit cards.
Generally fixed rate loans have a higher interest rate vs. a variable loan, thus, if RBA or banks don’t change rates you could be locked into a paying a higher rate for no reason.
What options do I have?
At Dreamstreet, we’ll review your home loan and financial situation to provide you with the best Loan product and structure. A potential outcome might be to split your home loan, that way you can take advantage of the low rate environment whilst being hedged if rate rises occur.
Enter your details below and preferred call back time and one of our friendly team will be in touch to help you find the best loan available.
The Dreamstreet Team