Interest rates are tipped to rise later this year. So, is it time to fix your home loan?

It’s fair to say money has been cheap in recent years, with home owners having access to the lowest fixed rates on record. 

And while the Reserve Bank may have kept the official cash rate on hold this week, economists are predicting rates to rise before the end of the year.

So, is it time I fixed my home loan rate?

It depends.

The main reason people fix their home loans is because if rates rise, they will have already locked in a lower rate.

And this fixed rate means you have regular, predictable payments.

It means you can budget for your interest rate costs and know what you’re up for (for as long as you locked your rate in, this could be between one to 10 years).

Right now, the bottom of the market has probably already passed.

Fixed rates got down to under 2 per cent last year, but they are already on the move, says RateCity’s director of research, Sally Tindall.

“In six months’ time, the majority of owner-occupied fixed rates are likely to start with a ‘3’, while investors could even be looking at some rates that start with a ‘4’,” she says. 

Take a look at this table. It shows the increases in rates on a two-year fixed rate from each of the big four banks (in 2021 and today).

Two-year fixed rates

1 year ago

Today

Difference

CBA 

2.14% 

2.69% 

0.55% 

Westpac

1.99% 

2.59% 

0.60% 

NAB 

2.09% 

2.69% 

0.60% 

ANZ 

2.09% 

2.59% 

0.50% 

The three-year fixed rates have gone up even more — by about 1 per cent!

But of course, rates could rise even further.  

And here are the variable rates, which have actually gone down since last year. 

Lowest variable rates 

1 year ago

Today

Difference

CBA 

2.69% 

2.29% 

-0.40% 

Westpac 

2.19% 

2.19% 

0.00% 

NAB 

2.69% 

2.29% 

-0.40% 

ANZ 

2.72% 

2.19% 

-0.53% 

Average 

2.57% 

2.24% 

-0.33% 

Note: rates are for owner-occupiers paying principal and interest. Some LVR requirements apply. Westpac’s variable rate in February 2021 was an introductory rate for 2 years. Source: RateCity.com.au.

“While we expect plenty of these to stick around in the short term, we could see some lenders start to hike variable rates in the second half of this year,” Ms Tindall says. 

But don’t panic, says Griffith University finance lecturer Di Johnson.  

“There are still some great fixed rate deals around compared to pre-COVID, as well as low variable rates,” she says.

So it’s probably time to ask yourself some questions about your loan and your own financial situation.

Can you afford it if rates go up?

“It’s helpful to try not to ‘time the market’ but rather to think about what your plans and goals are for the short-term and longer term,” Dr Johnson says. 

“Look beyond the headline interest rates — check all of the fees and features as well.” 

Have you borrowed too much? Has your work stability changed or has your income dropped since you first took out your loan?

It’s worth doing a comparison on whether you could still afford to pay your loan if it did go up by, say, 1 per cent (plug in your numbers on this Moneysmart mortgage repayment calculator).

And that can help you decide whether you need to seriously look at fixing your loan right now.

What are the risks of fixing my home loan?

Fixed loans don’t work for everyone.

Firstly, by fixing your loan, you’re taking a gamble.

Interest rates could of course go lower and you’re stuck paying a higher rate.

The loan is also fairly inflexible.

Source

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