With interest rates remaining low many home owners are asking themselves “Should I fix my home loan rate?”
In this article, we’ll be going over the factors you need to consider when deciding to fix your home loan, along with some tips on what to look for in a fixed loan.
Because your loan’s interest rate can have such a direct impact on your wallet and your lifestyle, the decision to fix your loan – or not – is an important one that should take into account your budget, your financial flexibility and your future plans.
Should you fix your home loan?
Fixed home loan interest rates are usually for a set period of time, with the most popular terms ranging from one to five years. During this time, your interest rate and monthly payments will not change, even if market interest rates go up or down.
The benefits of fixing your loan include:
- Predictable and even monthly payments
- Peace of mind, knowing you can meet your monthly budget.
While fixing your loan can help you lock in a low interest rate, the main reason to choose a fixed loan is to ensure that your monthly payment doesn’t change unexpectedly and cause financial difficulty. As a case in point, on a $500,000, 30-year, 5% variable rate loan, even a 2% increase could end up costing an additional $643 per month – a difference that may break even the most careful budget (these figures are shown as examples only).
The main reason to fix is to ensure your monthly payment doesn’t change unexpectedly.
When should you not fix your loan?
The downside of fixed-rate loans is that they tend to offer less flexibility than their variable counterparts. In particular, many fixed-rate loans won’t let you make extra payments or pay off your loan early without incurring extra charge. However, for borrowers with more flexibility in their budget, the choice of being able to pay off their loans faster and save thousands on interest can be a fair trade-off.
Many fixed-rate loans won’t let you make extra payments or pay off your loan early without incurring extra charge.
If you’re on the fence, another option is to go with a split-rate loan. Split-rate loans offer you the best of both worlds by allowing you to fix part of your loan while the other part is subject to a variable rate. When interest rates fall, you’ll benefit from lower payments, and when they rise, your budget won’t suffer as much.
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Tips for choosing a fixed-rate loan
Always make sure you read the fine print before signing on the dotted line. When considering a fixed-rate loan, be sure to check the following:
- What are the loan’s establishment and administrative fees?
- What is the amount you can repay early without incurring extra charge, and are these additional payments on a per annum basis, or across the term of the loan?
- What are the loan’s early exit or break fees, and how are they calculated?
- Is the loan portable to another property?
In many cases, a bank may be open to negotiating certain features of a fixed loan. For instance, if you find a better interest rate elsewhere, the lender may agree to adjust the rate rather than lose a good customer. Some banks may allow you to add an offset account, the only way to find out is to ask.
Read more: Home loans from HSBC
At the end of the day, the decision to fix your loan is a personal one based on your unique financial situation and lifestyle. Be sure to consult with a financial advisor or your bank to decide if fixing your home loan is the right choice for you.
Issued by HSBC Bank Australia Limited ABN 48 006 434 162 AFSL/Australian Credit Licence 232595.