The Reserve Bank of Australia (RBA) finally put an end to the historically low cash rate by announcing a 25 basis point cash rate hike that increased the official cash rate to 0.35%. Soon enough, three of the major banks in the country announced their decision to pass on the hike in full to their customers, increasing their variable home loan rates by a quarter of a percentage point.
While a quarter of a percentage point might not seem much, it can cost the average borrower an additional $65 a month, or $780 a year, to repay a $500,000 loan with a 25-year term remaining.
According to RBA governor Philip Lowe, the cash rate is expected to rise further, touching 2.5 per cent by the end of 2024. For homeowners who are still paying off their mortgage, this could mean increasing minimum monthly repayments over the next two years, which could stress their budget if they don’t plan ahead. Unsurprisingly, one common question that many homeowners are thinking about right now is whether they should fix their home loans or not.
To fix or not to fix your home loan?
The answer to that question is tricky. Fixing your home loan interest rate now for the next three to five years could probably shield you from future rate hikes, but you might find yourself paying at a higher rate for now. That’s because your variable rate home loan is likely to be cheaper than a fixed rate home loan at present.
It’s also worth considering the cost of refinancing or prepaying a fixed rate home loan. If you need to quit the loan before the end of the fixed-rate term, you’ll most likely need to pay a hefty fee to your lender. Fixed-rate loans are also often less flexible compared to variable rate home loans. For instance, you might be charged a fee for making extra repayments, or it might not be allowed at all in the fixed-rate period.
Still, if you are someone who feels extremely nervous about the potential interest rate hikes, or you prefer to have more visibility into your budget with fixed minimum monthly repayments to make, fixing your home loan could provide you with some peace of mind. If you choose this option, remember that your rate will only be fixed for a specific period. Once this period ends, you may be moved to a higher revert rate, which is something to be cautious about at the end of your fixed term.
A mortgage broker could help
Whether you decide to fix your home loan or not, it could still be helpful to get in touch with a mortgage broker. While some lenders have increased their home loan rates, there are still lower rates available, especially with some smaller lending institutions. A mortgage broker can help you in finding a competitive home loan deal with a lower interest rate than what you are currently paying. A difference of just 0.5% on your home loan rate could boost your savings and protect you from the subsequent rate hikes to some extent.
Once you are done with your research and found out about the best deals available to you, it’s worth speaking to your lender to ask for a discount before refinancing your home loan. Your broker can try to negotiate a discount with your lender, and even help you switch lenders if you wish to by guiding you throughout the process. Meanwhile, it’s worth saving every cent and paying more towards your mortgage while the interest rates are still low to reduce your debt.
If you want to find out more about paying down your mortgage faster or have any query related to a home loan product, you may want to contact a broker or ask a Hashching expert for their opinion.