Why it’s time to consider fixing your rate
News about the US election and a potential COVID vaccine has usurped our attention from the latest interest rate cut. But as a homeowner, you would be well advised not to forget to check in on your mortgage in the coming weeks. In particular, it may be worth considering fixing your rate.
The cash rate reached a new record low of 0.10 per cent on 3 November, and over the past several weeks, banks and other lenders have been announcing their interest rate response. Many big lenders have cut their fixed rates significantly, with some breaking the 2 per cent per annum barrier. However, most lenders have not cut their variable rates. This means borrowers who remain on their existing variable rate will be unlikely to benefit from this rate cut.
Pros and cons of fixing your rate
You may have considered fixing your rate over the years. The main benefit of fixing is that if interest rates go up, yours won’t. This can give you peace of mind that your repayments will not change during the fixed period regardless of what else happens.
However, fixing your interest rate for a period of time can have disadvantages. The key restrictions on a fixed rate loan are:
- You usually can’t close or make changes to your loan without a significant break fee.
- Your loan will likely have fewer features – most don’t offer an offset account and you usually can’t make unlimited repayments and redraws (although you can typically make some, and these vary from lender to lender).
- If rates drop, you won’t benefit.
Why is now a good time to fix your rate?
At the moment there are a number of fixed rate offers that are significantly lower than the variable rates. The average variable rate is at 3.34 per cent compared to the average three year fixed rate of 2.52 per cent.1 We are even seeing a number of fixed term rates starting with a 1, which is almost unheard of.
This means that if the restrictions of a fixed rate don’t apply to you, or aren’t a concern given your financial circumstances, you may be significantly better off fixing your rate now.
For example:
- If you have no intention of changing your borrowing plans and your financial situation is likely to stay as is, you are unlikely to need to break your fixed term.
- While low rates can offer you a unique opportunity to make extra repayments on your mortgage, many fixed rate loans allow up to $10,000 in extra repayments per year. If you don’t think you could repay more than that, fixing your rate won’t affect this.
- Not having an offset account just means you need to keep on top of transferring your money from a separate account onto your mortgage, to avoid paying more interest than you need to. A quick weekly or fortnightly transfer online should suffice – you may be able to set this up to happen automatically.
- It’s unlikely rates will go much lower, although of course it is possible. The RBA forecast is that rates will remain at this level for three years, although they could creep up more quickly if the economy does better than expected. In that case, those who fix their rates could stand to benefit even more.
How much could you save by fixing your rate?
Let’s examine a potential scenario to see what kind of savings fixing now could bring. We will assume that rates will stay as is for three years, and then increase by 0.5% p.a.
If you have a $400,000 loan, with an average variable rate of 3.34% p.a.,3 and you choose to fix your rate for five years at the average fixed rate of 2.91% p.a., you would reduce your repayments by $150 per month and save a total of $7,728 over the five year period.
Your best bet is to contact your Mortgage Choice broker to discuss the pros and cons of fixing your rate given your individual circumstances. Your Adviser can help you determine if fixing is the right move for you.
SOURCES: 1https://mozo.com.au/home-loans/articles/november-rba-cut-which-banks-have-cut-home-loan-rates, 2https://www.mortgagebusiness.com.au/breaking-news/15105-cash-rate-not-expected-to-rise-for-at-least-three-years-rba, 3Assumes a principal and interest 25-year loan and no fees.
