Should you fix your home loan?

When contemplating home ownership or refinancing an existing mortgage, we typically face the decision of choosing between a fixed-rate or variable-rate home loan. This guide provides a comprehensive analysis of the pros and cons of fixing your home loan.

Key takeaways

  • An understanding of the benefits of fixing your home loan, including payment stability, protection from rate hikes, and cash flow certainty over a period.  
  • The potential drawbacks to consider when choosing to fix, such as missing out on rate drops, higher initial repayment rates, and restrictions on the level of additional repayments. 

When contemplating home ownership or refinancing an existing mortgage, we typically face the decision of choosing between a fixed-rate or variable-rate home loan. While both options have their merits, deciding whether or not to fix your home loan requires careful consideration of various factors.

This guide provides a comprehensive analysis of the pros and cons of fixing your home loan to help you make an informed decision. 

Understanding fixed-rate home loans

A fixed-rate home loan is a mortgage with a set interest rate that remains constant for a predetermined period, typically between one to ten years. This means that regardless of market fluctuations, your monthly mortgage repayments will remain unchanged during the fixed period. After the fixed period ends, the loan usually reverts to a variable rate unless you choose to refinance or renegotiate. 

Pros of fixing your home loan

Fixed home loans come with a range of benefits, with the common thread through each being predictability and a degree of financial certainty.

  • Payment stability - One of the most significant advantages of a fixed-rate home loan is the predictability it offers. With a fixed interest rate, you can budget more effectively as your mortgage payments remain consistent, making it easier to manage your finances.
  • Protection from rate increases - If interest rates rise during your fixed term, your mortgage repayments will remain unaffected. This can provide peace of mind and protect you from potential financial strain due to increased borrowing costs.
  • Long-term planning - Fixed-rate home loans are beneficial for individuals who prefer long-term financial planning and want to secure a consistent interest rate over several years.
  • Rate environment predictability - When market interest rates are expected to rise, fixing your home loan can be a wise decision as it allows you to lock in a lower rate before the increase takes effect.

Cons of fixing your home loan

Whilst fixing your home loan can be beneficial, you should be aware that it can have its drawbacks under certain market conditions.

  • Limited flexibility - The main drawback of a fixed-rate home loan is its limited flexibility. If you decide to sell your property or refinance during the fixed period, you may be subject to break fees, which can be substantial.
  • Missing out on rate drops - While you are protected from rate increases, you will also miss out on potential savings if market interest rates decline during your fixed term.
  • Higher initial rates - Typically Fixed rates loans have a higher interest rate than variable rate borrowings. Fixed rates can sometimes be an indicator for future interest rate changes for example in a rise interest rate environment its typical for fixed rates to be higher than variable rate loans and conversely we also see fixed rates below the variable rates in a falling interest rate environment.
  • Smaller extra repayments - Many fixed-rate home loans limit the level of extra repayments you can make during the fixed period, reducing your ability to pay off your mortgage faster.

Factors to consider before fixing your home loan

Consider the current economic conditions and interest rate forecasts. If interest rates are at historical lows or are expected to rise in the near future, fixing your home loan might be a prudent choice. 

Assess your financial stability and capacity to handle potential rate fluctuations. If you value the certainty of fixed payments and can afford the slightly higher rate, a fixed-rate loan could be suitable.

Evaluate your long-term plans and how they may align with your mortgage. If you anticipate selling your property or refinancing in the near future, a variable-rate loan might offer more flexibility.

A mortgage broker can assist by conducting a thorough comparison of fixed and variable-rate home loan offers from various lenders. Analyse interest rates, fees, and loan features to find the most suitable option.

Another option to consider is to split your loan, fixing a portion and leaving the rest as a variable rate. This strategy combines the benefits of both options, offering some stability and the potential for savings.

Making the decision

Seeking professional advice can ease the decision-making process. Consult with a mortgage broker or financial adviser to understand your individual circumstances better. Together, they can provide personalised lending advice based on your financial goals and market conditions. 

It's also important to review your loan on a regular basis, rather than adopting a set and forget approach. If you opt for a fixed rate, it's essential to periodically review your loan to ensure it still aligns with your financial objectives. Circumstances may change, and refinancing may become a viable option.

In summary

Deciding whether to fix your home loan involves a careful analysis of your financial situation, future plans, and the prevailing economic climate.

A fixed-rate home loan can provide stability and protection against rising interest rates but may limit your flexibility and potential savings. On the other hand, whilst a variable-rate home loan may offer more flexibility, it does expose you to interest rate fluctuations. 

Ultimately, the right choice depends on your individual circumstances, risk tolerance, and long-term financial goals. Consulting with a mortgage broker or financial adviser can be invaluable in helping you make an informed decision that is appropriate for your circumstances and aligns with your unique needs and preferences. 

Remember that both fixed and variable-rate loans have their merits, and the best option is one that suits your specific situation and future plans.

Choosing the right home loan structure will set you on a path towards a secure and comfortable financial future, so it is important that you take the necessary time to get it right. You can also get help from a mortgage broker to find the loan that is right for your needs.

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Disclaimer: This document has been prepared by IOOF Finance Choice Pty Ltd ABN 74 129 728 963 ACL 385191 (IOOF Finance Choice). The information in this document contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document you should assess your own circumstances or seek advice from your financial adviser. You should also obtain and consider a copy of the relevant Product Disclosure Statement before you acquire a financial product to determine if it’s right for you. While IOOF Finance Choice has taken all reasonable care in producing the information in this document, IOOF Finance Choice makes no representations in respect of, and, to the extent permitted by law, excludes all warranties in relation to the accuracy or completeness of the information. IOOF Finance Choice, its officers, employees, directors and contractors exclude, to the maximum extent permitted by law, all liability whatsoever for any loss or damage howsoever arising out of reliance, in whole or in part, on the information in this document.