Should I lock in my home loan rate?

The beginning of 2021 has seen lenders offer the lowest fixed interest rates on record. Many lenders now offer fixed rates for owner occupied loans of under two per cent, which is approximately 50 basis points lower than the comparable variable interest rate. Given the interest rate differential between fixed and variable, we are regularly asked: should I be fixing my home loan?

Before making a decision around whether to fix or not it is important to consider the following:

  • Are you currently or intending to make additional repayments on your home loan (either regularly or ad hoc) above the minimum contractual amount?
  • Are you planning on selling the property in the near term?
  • Will you look to utilise the equity in your property in the near term via a refinance?

If the answer to any of the above questions is yes, fixing 100 per cent of your loan is unlikely to be the best strategy.

It is important to understand the restrictions around fixed rate products prior to switching your loan from a variable rate. Below is a summary of some of the restrictions around fixed rates:

  1. Most fixed rates have limits on the quantum of additional repayments you can make during the fixed term (typically no more than $10,000 per annum) before penalties apply
  2. In most circumstances you are unable to link an offset account to fixed rate products
  3. In most circumstances you are unable to access additional repayments you have made via redraw whilst on a fixed rate
  4. If you payout the fixed rate prior to expiry (via refinance, inheritance or sale of the property) significant break costs can be incurred
  5. To secure the advertised fixed rate at application stage, you will need to pay a “rate lock” fee, which can equate to thousands of dollars depending on the loan size. The “rate lock” fee is optional, however there is a risk that the fixed rate moves between application stage and settlement.

There are also benefits to a fixed rate loan, given it will provide you with a known interest rate over a fixed term of 1,2,3 or 5 years for example at a low cost. Therefore, for investors or owner occupiers who do not intend to repay a large portion of their loan in the short to medium term, fixed rates can be a sensible option.

Given the restrictions associated with fixed rates it is common for borrowers to opt for a split loan (partial fixed and partial variable), so as to avail of the lower fixed rates, and to maintain the flexibility associated with a variable rate loan.

Choosing the right option

For an obligation free review of your home loan or investment loan, contact your Bentleys finance advisor to guide you through the options that are best suited to your needs.

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