Switching from a variable rate to a fixed rate: what do you need to know?

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The Reserve Bank cut official interest rates to 0.1% in early November, but instead of the usual variable rate cuts on home loans, it looks like the majority of lenders are cutting fixed rates instead.

Since March, the average 2-year fixed rate among the providers we track has increased from 3.13% per year to 2.48% per year.

So, for anyone looking for a home loan or considering changing the terms of their existing loan, the fixed rate options currently available can be appealing. But there are some things you need to know before you get started.

What are the advantages of a fixed rate?

Fixed terms are usually offered for a period of one to five years and during that time your interest rate will be locked in. This means that the amount you pay back will not be affected if your lender decides to increase the rates, so you don’t have to adjust your monthly budget. .

This can be especially useful if you have other financial commitments or want to maintain a certain standard of living while paying off your loan. Of course, you’ll have to consider the likelihood that interest rates will rise in the first place …

Will official interest rates rise soon?

Official interest rates are set by the Reserve Bank of Australia and for several months now it has been clear that they will not be increased until employment and inflation prospects improve.

In recent statements, the RBA has said these economic goals are unlikely to be met for at least three years. So while some may feel a sense of urgency to lock in a fixed rate, the chances are high that low mortgage rates will be with us for a while.

What happens after the fixed term ends?

Once the fixed term has ended, your home loan will automatically be renewed at a standard variable rate. This is called a return rate and it can be considerably higher than what you were initially offered.

After a year or more of regular repayments, a sudden increase can be a shock. To avoid this, it’s a good idea to speak with your bank or lender before the fixed term expires to see if you can negotiate a better deal.

This may involve a request to refix (at your lender’s new rate) or a switch to a more attractive variable rate. And if the offers on the table are not competitive, there is always the possibility of refinancing with another lender.

Will I have the same functionality?

One of the great advantages of variable rate loans over fixed loans is that they tend to offer more features. Many fixed rate loans do not come with a redemption facility or a clearing account, so you will need to carefully weigh your options if they are important to you.

Some also limit the amount of additional refunds you can make by setting an annual cap (beyond which charges are incurred) or limiting them completely. This can be a big hurdle, especially if you end up with a little extra cash that you want to spend on your loan.

Fixed rate home loans also tend to charge higher switch and breakage costs, so if you find a better deal elsewhere and want to refinance during your fixed term, you could face a hefty penalty.

Can I split my loan?

If you can’t decide between the flexibility of a variable rate and the security of a fixed rate, there is also the option of splitting your loan. This takes your home loan and splits it into two smaller loan accounts, one fixed and the other variable.

How you structure your loan will be up to you. Splitting your loan will also give you access to the features and flexibility typically associated with an adjustable rate loan, in addition to allowing you to take advantage of any drop in interest rates, if only partially.

For more information on the direction mortgage lending is going, visit our home loan statistics page. And if you’re planning on locking in a low fixed rate, head over to our Fixed Rate Comparison page to browse what is currently available.

* CAUTION: This comparison rate only applies to the example (s) given. Different amounts and conditions will result in different compare rates. Costs such as redemption or prepayment charges, and cost savings such as fee waivers, are not included in the comparison rate but can influence the cost of the loan. The comparison rate displayed is that of a guaranteed loan with monthly repayment of principal and interest of $ 150,000 over 25 years.

** The initial monthly repayment figures are only estimates, based on the advertised rate, loan amount and term entered. The rates, fees and charges and therefore the total cost of the loan can vary depending on the amount of your loan, the length of the loan and your credit history. Actual repayments will depend on your personal circumstances and changes in interest rates.

^ See information on the Mozo Experts Choice Home Loan Awards

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