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If you are an existing homeowner with an ongoing mortgage, you might be worried about future interest rate hikes and how they are going to impact your household budget.

Until recently, homeowners were enjoying a golden period of historically low-interest rates. However, the RBA’s recent cash rate hike, which is the first since November 2010, has led to confusion and panic for some homeowners, as many of them have never experienced an interest rate hike and don’t know how to deal with it. 

Leading to even more panic is the speculation about future rate hikes. According to RBA governor Philip Lowe, the cash rate could increase to 2.5 per cent over the next two years. Even the big banks have updated their cash rate forecasts. The CBA expects the cash rate to hit 1.6% by February 2023, and NAB predicts a further rise, taking the cash rate to 2.6% by August 2024.

All these predictions are making the borrowers nervous. Many are considering whether it’s the right time to fix their mortgage rate to cushion their finances from the impact of future rate hikes. However, the fixed interest rates offered by many lenders are currently higher than their variable rates. Therefore, it’s not definite that every borrower will save from switching to a fixed-rate home loan. Still, mortgage brokers have warned that some borrowers are so concerned about rate hikes that they are considering switching to fixed-rate loans that charge almost 1% extra in interest than what they are currently paying. 

 

When should you fix your mortgage?

If you are currently on a variable rate home loan with a good repayment history, you might be in a good financial position to refinance your home loan to a fixed-rate loan.

A fixed-rate home loan gives homeowners the security of fixed repayments for a limited period, up to five years, in some cases. Amidst the ongoing panic, the stability of knowing you have to pay the same rate of interest over the next few years can be comforting. However, it’s worth knowing this comfort is temporary. Your interest rate will revert to the lender’s ongoing variable interest rate at the end of the fixed term unless you fix it again. 

While a fixed rate might give you some stability and probably shield you from a few rate hikes, you might not get some useful features, like an offset account facility. Fixed-rate home loans are also less flexible in allowing additional repayments, and you might be charged extra if you want to prepay the loan or refinance during the fixed interest rate period.

If you switch to a fixed rate home loan now, you could also see your interest rate increase, as fixed interest rates have been rising for quite some time compared to variable interest rates. However, that doesn’t mean it’s too late to switch to a fixed-rate home loan, as you could still find some competitive deals on the market. But remember it might not be the best solution for every borrower. 

The interest you save by switching to a fixed-rate mortgage will depend on the current rate you are paying and the interest rate you choose. The same factors can also help you decide whether it’s worth fixing your loan or not. Additionally, it’s important to remember that there’s more to managing your home loan than securing a lower rate. Make sure to compare the features and fees to find a home loan that suits your needs. 

If you don’t want to fix your mortgage but wish to save some money on your home loan,  you might consider refinancing to a cheaper variable rate than what you are currently paying. Even though the big banks have passed the rate hike to their customers, several small lenders continue to offer competitive interest rates. If you are able to land a better deal on your home loan, you can save some money and use it to make additional repayments to reduce your debt before the next rate hike.

To make an informed decision, you might want to calculate how much money you can save by shifting to a fixed interest rate for the next five years if the interest rate predictions were to come true. A broker can help you crunch the numbers and also check if you can find a cheaper variable rate home loan to save some money on your repayments and use it to pay off your debt faster. They can discuss the pros and cons of both with you to help you pick the most suitable option to achieve your goals. If you have queries about fixing your mortgage or refinancing your home loan, you can speak with a mortgage broker or ask a Hashching expert for their opinion.

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