Should I fix my home loan interest rate?

Here are the key advantages and disadvantages:

Advantages

If the RBA raises interest rates during your chosen fixed period (one, two, three, four or five years), your rate will not change.
During the fixed period, your repayments will not change.
You can budget with greater certainty because you’ll know what your repayments will be throughout the fixed period.

Disadvantages

If the RBA cuts interest rates during the fixed period, your rate will not change.
You may not benefit from lower repayments if rates fall during the fixed period.
Budgeting may be more difficult because your repayments can change when interest rates change.
You are generally limited in the amount of extra repayments you can make during the fixed period.
You generally cannot link an offset account to a fixed-rate home loan, although a small number of lenders offer this feature.
If you repay your home loan in full during the fixed period, whether by selling your property, refinancing or using your own funds, you may incur a substantial break cost.

The best option will depend on your needs, goals and personal circumstances. Consider the points above in the context of your own situation.

The middle path: splitting your loan

If you’re undecided and do not plan to repay your home loan in full during the fixed-rate period, you could split the loan into a fixed-rate portion and a variable-rate portion.

This approach can provide greater certainty over your monthly budget because the rate and repayments on the fixed-rate portion will not change during the fixed period.

The variable-rate portion can still be linked to an offset account and allows you to make unlimited additional repayments without incurring break costs.

If the rate on the variable portion changes, the effect on your total repayments will be smaller because it applies to a lower loan balance.

Consider this example

Fully variable

Assume you have a $500,000 loan with a variable interest rate of 6.20%.
The current repayment would be approximately $3,062 per month.
If the rate increased by 0.25%, the new variable rate would be 6.45%.
The new repayment would be approximately $3,144 per month, an increase of $82.

Split 50/50

Now assume you split the loan 50/50, with one portion fixed and the other variable.

The $250,000 fixed portion is fixed for two years at 6.49%, with repayments of approximately $1,579 per month throughout that period.
The $250,000 variable portion has a rate of 6.20%, with repayments of approximately $1,531 per month.
If the variable rate increased to 6.45%, the repayment on that portion would rise to approximately $1,572 per month, an increase of $41.

The result

Under this structure, the total repayment would be approximately $3,151 per month, slightly higher than the repayment on the fully variable loan after the first rate increase. However, each subsequent 0.25% increase would add only around $41 per month to the split loan’s repayments, compared with approximately $82 per month for the fully variable loan. You would also retain the flexibility to make unlimited additional repayments on the $250,000 variable portion.

The trade-off is that if rates fall during those two years, the fixed-rate portion will not benefit from the reduction, although the variable-rate portion will.

Compare your options

Fixed rates, like variable rates, differ between lenders.

Get tailored guidance

If you’re considering fixing all or part of your loan, book a chat. I can guide you through the available options based on your personal circumstances, goals and needs.