Should you choose a fixed or variable home loan rate when interest rates rise?

It’s been over a decade since we’ve seen an interest rate rise, and this means an adjustment for many Australian homeowners.

With many pondering the change to a fixed rate, variable rate or split rate loan, we take a look at why rates go up, and the best options to help you manage your home loan.

Why interest rates rise

In order to reduce inflation, manage employment levels and regulate the economy, the Reserve Bank of Australia (RBA) increases the cash rate.

In doing so, this can mean an increase in home loan interest rates if banks choose to pass the rise onto customers. When this happens, home loan holders often question whether they’d be better off with a fixed rate if they’re on a variable rate, or vice versa.

So, which is best for you?

Fixed rate home loans

If you place a high value on certainty, you might enjoy locking in a fixed rate loan. As fixed rates don’t fluctuate with the market, it means you’ll pay the same monthly repayments for your fixed term.

It certainly makes it easier to plan a budget, whether it’s for big ticket items or day-to-day expenses. Just remember, you’ll need to be prepared to pay more than others if interest rates decrease.

You can also make extra repayments, helping to pay your loan off sooner – up to $5,000 annually before your extra payments attract a penalty fee.

Fixed rates can offer security over the fixed term, but be aware of the variable rate you’ll pay once this term expires. It pays to know this ‘revert’ rate can be a fair bit higher than the fixed rate, so be sure you have the funds to meet any increase in monthly costs.

While locking in your rate might fill you with certainty, you lose some flexibility. Keep in mind that break costs can apply if you need to leave the contract before the fixed rate term ends. It’s worth considering whether any changes to your financial situation are on the horizon, such as any plans to sell your house soon. 

Variable rate home loans

At the other end of the rate spectrum is variable rates. These move with the market, and the recent rate increase has home loan customers querying the benefits, if they’re going to see an increase in repayments.

The obvious benefit? If variable rates decrease, your repayments do too.

Another advantage is being able to make extra repayments with a redraw facility. This feature allows you to withdraw the additional money you’ve put in if you need it, giving you greater flexibility when it comes to accessing extra funds.

Unlike a fixed loan, you can make extra repayments without any limits or penalties, helping you pay off your loan sooner.

An offset account is another great feature. An offset works like a transaction account, and enables you to reduce the interest you pay when you link it to your home loan.

This level of flexibility is something to consider if you think your circumstances might change soon, such as a pay increase or increasing expenses.

Which type of rate you choose all comes down to your risk tolerance, but there’s also another option.

Split home loans

See the advantages of both fixed and variable rate loans?

A ‘split loan’ literally splits the difference, allowing you to divide your home loan into two portions. So you get the flexibility of a variable rate with the security of a fixed rate.

To learn more about choosing the best rate type for you, talk to a BOQ home loans expert today.