The variables of a variable home loan

Australians have enjoyed record low home loan rates for around a decade now, so for many of us, a mortgage has been a set-and-forget proposition.

Recently though, the Reserve Bank of Australia (RBA) has increased interest rates. This has prompted many borrowers to convert to a fixed rate loan without properly revising their current situation.

A typical mortgage has a variable interest rate which fluctuates up or down with interest rate movements. Accordingly, your payments go up and down too.

Conversely, a fixed rate mortgage provides certainty that your interest rate is locked-in and won’t be subject to rate changes. The fix usually is set for a certain period – between one and five years – after which time your loan will revert to a variable rate.

Additionally, fixing your home loan rate is a helpful way of budgeting as you will always know what your payments will be.

Sounds like a win, right?

Well, not necessarily. Fixing your rate can seriously impact the structure of your loan and affect the features available to you.

Before making any decisions, consider these points.

• There is less flexibility in a fixed rate loan, for example, you may not be able to make extra repayments or negotiate with your lender for a better deal.
• There may be fewer features available to you, such as offset accounts or redraw facilities.
• Penalties may apply if you try to refinance or alter your loan during the fixed term.
• You are locked in if interest rates go down which means you could end up paying more than you should. If you try to break the fixed term, you’ll probably be slugged with a hefty fee.
• Moving to a fixed rate generally attracts service Depending on your lender, these could amount to several hundred dollars.

These fees and restrictions may mean it takes longer for you to pay off your loan, so while fixing your rate may seem attractive in the first instance, it may, in fact, not be right for you.

It may be that a split loan is better for you; where you fix part of your loan leaving the remainder at a variable rate. In this way you may be able to fix the interest rate on one part, and retain the features you need on the balance.

It’s important to carefully weigh your options, and this is where mortgage brokers are helpful. They can look at where your loan is currently, the features you need and ensure your mortgage works with your lifestyle.

As our lending climate remains uncertain, it’s important to do your sums and seek professional advice, after all, we may never return to the soaring 17% rates of 1990, but any rate movement should be a trigger to review your financial position.