Interest rates have increased significantly in recent years, leaving many Australians wondering if the rate hikes are over or if further increases are on the horizon. If you're asking yourself, "Should I fix my home loan?" you're not alone. As mortgage brokers in Australia, we understand how important it is to make an informed decision. Let’s explore the options available to you and help you navigate the current market to secure the best deal for your home loan.
Buying a home is one of the biggest financial commitments you’ll ever make, so selecting the right home loan is crucial. If recent interest rate hikes have made you reconsider your current home loan, you might be asking yourself – should I fix my home loan?
In this article, we explore what it means to fix your home loan, the pros and cons, and the impact of the ‘fixed rate cliff’ that many Australian borrowers are facing.
What happens when you fix a home loan?
When you opt for a fixed-rate home loan, you’re locking in an interest rate for a set period, typically ranging from one to five years. During this fixed-rate term, your interest rate remains the same, providing stability and predictability for your repayments. Unlike a variable home loan, where rates can fluctuate, a fixed rate ensures your monthly repayments won’t change, helping you budget with confidence.
Should I Fix My Home Loan in 2025?
Deciding whether to fix your home loan rate in 2025 ultimately comes down to your personal financial situation, risk tolerance, and your outlook on market conditions. There is no one-size-fits-all answer, as what works for one borrower might not work for another.
As of 2024, the Reserve Bank of Australia (RBA) has maintained a steady cash rate, with many banks and lenders keeping their variable home loan rates stable. However, following significant rate hikes between 2022 and 2023, many homeowners are still feeling the pinch of higher variable rates.
Looking ahead to 2025, some economists predict that the RBA may begin to lower the cash rate, which could result in reduced variable rates. However, other experts caution that more rate hikes may still be possible, depending on inflation and economic conditions.
Given the uncertainty in the market, fixing your home loan in 2025 might offer the security of predictable repayments, shielding you from any potential future rate increases. However, if you believe that rates will decrease, you might prefer to stay on a variable rate and take advantage of any future reductions.
Ultimately, understanding the advantages and disadvantages of fixing your home loan will help you make a more informed decision based on your financial goals and the economic landscape.
Pros of Locking in a Home Loan Rate
There are several advantages to fixing your home loan rate, including:
Protection from Rate Rises: If interest rates are on the rise, locking in a fixed rate can offer peace of mind, as your repayments will remain the same throughout the fixed term. You’ll be shielded from any potential interest rate hikes, ensuring your costs stay predictable.
Certainty in Your Repayments: With a fixed-rate loan, you’ll know exactly how much your mortgage will cost you each month. This makes it easier to create and stick to a household budget, without the worry of rising interest rates affecting your finances.
Potential to Save on Fees: Fixed-rate home loans can sometimes have fewer associated fees compared to variable loans, which may come with extra costs like redraw fees or account maintenance charges. If you’re comfortable without these features, fixing your rate might help you avoid unnecessary expenses.
Cons of Locking in a Home Loan Rate
Before locking in a rate, it’s important to consider the potential downsides:
Lack of Loan Features: Fixed-rate loans often don’t offer the same flexibility as variable loans. Features like offset accounts or redraw facilities, which allow you to make additional repayments or access funds, are typically not available with fixed-rate loans. Check with your lender, though, as some features may be offered in certain circumstances.
Missing Out on Rate Cuts: If interest rates fall after you’ve locked in your rate, you won’t benefit from the reduction. Instead, you’ll be stuck with your fixed rate for the duration of the term, potentially paying more than borrowers with a variable rate.
Break Fees: If you decide to exit your fixed-rate loan early, you may incur break fees. These fees can be significant, depending on factors like how much time is left on your fixed term and the outstanding loan balance, so it’s important to factor this into your decision.
Can You Switch to a Fixed Home Loan from a Variable One?
Yes, it’s possible to switch from a variable rate home loan to a fixed rate loan, a process known as refinancing. Refinancing allows you to change your home loan to a different one, either with your current bank or lender, or with a new provider.
There are several reasons you might consider refinancing. If you’re concerned about rising variable rates, switching to a fixed-rate loan can provide the security of knowing that your repayments will remain the same each month. Alternatively, if you’ve had your existing loan for a while, refinancing might help you secure a better deal.
What Does It Cost to Refinance a Home Loan?
Refinancing a home loan comes with costs, and it’s important to factor these into your decision. According to finance expert Michael Phan from Avenstone, the cost of refinancing can range from $75 to $2,108, with the average cost being around $807.
These costs can include discharge fees, application fees, and valuation fees. If you’re switching from one fixed-rate home loan to another before the end of your fixed term, you may also face break fees, which can be substantial depending on the terms of your original loan.
What Happens When a Fixed Home Loan Term Ends?
As your fixed-rate home loan term nears its end, you might be asking yourself, "Should I fix my home loan again?" When your fixed rate expires, you have several options:
Revert to the lender’s variable rate: After the fixed term ends, your loan may automatically switch to the variable rate offered by your lender.
Refinance to a new fixed rate: You can choose to refinance your loan, locking in a new fixed rate with your current lender or a new one.
Refinance to a new variable rate: Alternatively, you may decide to switch to a new variable rate with your current lender or a different one.
However, it’s important to note that when your fixed rate ends, the available interest rates may be higher than what you initially locked in. Many Australian homeowners are facing this situation, which has been termed the "fixed rate cliff."
What is the Fixed Rate Cliff?
The "fixed rate cliff" refers to the sharp increase in mortgage repayments some borrowers face when their fixed-rate term ends. If you secured a low fixed rate during a period of historically low interest rates, such as in 2020-2021, your repayments may increase significantly when your loan switches to a higher interest rate at the end of your fixed term.
In November 2020, the Reserve Bank of Australia (RBA) set the cash rate to a record low of 0.10% to counteract the effects of the COVID-19 pandemic. This allowed banks to offer home loan interest rates at historically low levels, prompting many Australians to lock in low fixed rates. However, in early 2022, the RBA began increasing rates, catching many borrowers off guard, especially those with five-year fixed terms taken out during the low-rate period.
As a result, many borrowers will soon face much higher repayments when their fixed terms end, leading to what is known as the "fixed rate cliff."
Could 2024 Be a Good Time to Refinance Your Home Loan?
If your fixed-rate term is ending in 2025 and you're considering refinancing, you may want to explore the possibility of locking in a new fixed rate, particularly if you anticipate that rates may continue to rise. While current fixed-rate loans may be higher than the low rates you initially secured, there could still be opportunities to find competitive offers in the market.
Canstar tracks the average fixed and variable home loan rates from various lenders, helping you compare your options. You may even be able to negotiate a better deal with your existing lender, especially if you meet their criteria for loan size and loan-to-value ratio (LVR). Additionally, some lenders may offer discounts or refinance cashback incentives to secure your business, making 2025Sure! Please provide the content or topic of the post you would like me to write an excerpt about. a potentially good time to refinance your home loan.
Refinancing in 2025 may be a good opportunity to reassess your mortgage options, potentially securing a deal that suits your current financial situation.
Contact Avenstone today at (03) 9566 7247 or complete our free online assessment form to get started!
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