Mortgage interest rates right now in Australia are the cheapest they have ever been, with many fixed rate loans available for less than 2%. But just because fixed interest rates are low, does that mean now is the right time to lock in your mortgage?
When you take out a home loan, you can choose between a fixed and variable interest rate. Variable rates can rise and fall at the lender’s discretion, often loosely attached to the cash rate decisions the Reserve Bank of Australia makes.
However, fixed rates don’t change during the “fixed” period, which is usually between one and five years.
There are two main things you need to consider before you lock in a fixed rate home loan: money and time.
Money, because that’s what is truly on the line here. In the current market, you may be able to fix your home loan interest rate on a mortgage product as low as 1.89%, which is quite a bit lower than the current variable rate products on the market. If you refinance to a lower rate, you could save hundreds (or thousands) of dollars in the first year alone.
We’ll unpack the potential cash savings in a moment – but first, let’s touch on the time aspect.
While there are plenty of savings on the table when fixing your home loan, there is one huge potential downside to fixed interest loans, and that is the fact that you are locked into a specific interest rate for a specific period of time.
If you’re planning to stay in your home for the long term, and you can see no possible reason, situation or circumstance that would make you even consider moving house in the next two, three or even five years, then a fixed rate loan might be for you.
But if your situation changes – or if the market or the broader economy changes, due to something like an unexpected global pandemic – then you could find yourself paying far more than you need to pay for your home loan.
Worse still, if you need to break your fixed interest rate contract for any reason, you could be out of pocket by thousands (or tens of thousands) of dollars.
How much does it cost to break your fixed rate loan?
If you need to end your fixed rate loan, there is no set fee or formula you can use to work out how much it costs to break a fixed rate loan.
This is because the fee you’ll pay your lender depends on how much money they stand to lose when you exit your loan contract.
They have lent you the money at a specific rate. The lender has budgeted and prepared to receive income (in the form of loan repayments) based on that interest rate, until the loan expires, and they have borrowed money to fund that loan with that profit margin allocated.
Therefore, it’s quite a complicated calculation on the bank or lender’s behalf when you decide to break a fixed rate loan.
The amount you’ll be charged could change daily, depending on a range of factors, including the overall loan term, the length remaining on the fixed rate, the value of the loan and broader economic conditions.
The total fee you pay can be substantial. Unfortunately, I know this from bitter experience; I once broke a fixed rate loan and the fee was almost $10,000.
So before you opt to fix your interest rate, make sure you’re as certain as you can be that you won’t want to end your loan any time soon.
How much can you save with a fixed loan?
We’ve discussed the potential drawbacks of taking out a fixed rate loan. But what about the potential savings on the table?
Let’s say you have a mortgage of $620,000, which is roughly in line with the average Sydney loan size in 2020, according to the Australian Bureau of Statistics (ABS).
On a variable rate, 30-year home loan at 2.49%, your repayments would be $2,446 per month.
On a 2-year fixed rate at 1.89%, your mortgage repayment would drop to $2,257.
That’s a saving of $189 per month or $2,268 per year.
The actual savings you could potentially make in your personal situation depend on your loan size and loan term; you can calculate how much you stand to save on a lower rate mortgage to see the savings for yourself.
One other reason to consider a fixed rate loan is related to repayment consistency. When you have a fixed rate loan, you know exactly what your repayments will be each month, which can make it much easier to budget.
As to whether now is the right time to fix?
The answer to that much-asked question really depends on you and your personal situation. Your loan amount, loan term remaining, current interest rate and your goals will all impact your decision. One thing remains certain: the mortgage market has never been more competitive, so whether you want to look at a fixed rate or variable loan, there’s never been a better time to shop around for a great-value deal on your mortgage.