Should I Fix My Home Loan?
Whether you should switch to a fixed rate depends on your home loan objectives and financial situation. Here are some factors to consider.
If You Fix Your Interest Rates Now
Rate rises won’t affect you until your fixed term ends. Experts have predicted that there are more rate hikes ahead and they will not come down until early 2024 at the earliest.
Your monthly repayments will remain the same, saving you money.
Budgeting is easier, as you have predictable monthly repayments.
Rate cuts also won’t affect you. Rates can start falling before your fixed loan expires. In this case, you are stuck paying a higher rate.
You might not be able to access features such as extra repayments, redraw and offset facilities.
You may have to pay large break fees if you refinance or switch back to variable rates before your fixed-rate period expires
Once your fixed-rate period ends, your lender will roll you to potentially higher variable rates unless you refinance or make other changes.
At the beginning of 2023, the cash rate sits at 3.10%. These are the predictions as to how high rates will go, offered by senior economists from big four banks:
ANZ: Cash rate will go as high as 3.85% by May 2023 with a series of 25-basis-point hikes each month.
CommBank: Cash rate will rise to a peak of 3.35% by February 2023, when it will potentially pause.
NAB: Cash rate will rise to a high of 3.60% by March 2023 and remain stable for the rest of the year before lowering again by March 2024.
Westpac: Cash rate will rise to 3.85% by 2023 and potentially decline by 2024.
If we look closely at the predictions, interest rates are expected to peak in the middle of 2023 and will start declining from early 2024. Assuming that banks pass rate rises in full, fixed rates are expected to find their ceiling at around 7%.
The pace of rate rises over the last year suggests that they have not reached a peak yet.
Borrowers who think a fixed rate might be a good option for them might consider a term of less than two years. This would save them from increasing rates in 2023 and allow them to benefit from the anticipated falling rates once their fixed period expires. If they lock in a rate for more than two years, variable rates might fall before their fixed term ends and there would be a high chance of them being stuck paying a higher rate.
If You Keep Your Variable Rate
Save money in interest and repayments if interest rates start falling earlier than predicted.
You can refinance with low or no break fees and reduce your repayments.
You are more likely to be able to make extra repayments and access additional features, such as offset facilities.
Be sure you are able to adjust to increasing repayments if the rates keep rising. If not, you could risk missing repayments or even default.
The main reason borrowers opt for fixed rates is that they expect rate hikes in the near future and want to avoid them. However, since fixed rates are currently higher than variable rates, borrowers need to evaluate how much their monthly repayments would be at any fixed rate offered and whether it’s worth it to pay that increased repayment in exchange for cost certainty.
It’s always a gamble, as nobody can predict the future of the economy.
If you’re weighing up your options get in touch with a broker to discuss what might be the best fit for your circumstances and risk profile.