Is now a good time to lock in a fixed rate?
With interest rates at record low levels, today we’ll look at a question that many are asking: should I lock in a fixed rate home loan?
You may have recently received a call directly from your bank, or seen more ads than usual across the internet spruiking super low fixed-rate mortgages.
Here’s why: lenders are scrambling over one another to lock-in customers right now.
And their weapon of choice? Fixed-rate home loans.
With so many families doing it tough right now, locking in a low fixed interest rate can be an appealing option to reduce your monthly repayments and obtain peace of mind.
And while it may very well be a good route for your family, like most things in life, it’s important to weigh up the pros and cons before you leap.
Consideration 1: The bank is not offering it out of the goodness of their heart
Let’s get the obvious one out of the way: banks are not promoting fixed-rate home loans right now as an act of goodwill.
They’re there to sell a product. And they often use this product in particular when they’re trying to stop clients from walking away. Not only are you locking in a rate, but the lender is locking you in, too.
Consideration 2: Loss of flexibility
We all know the big benefit of locking in a fixed rate: you get a guaranteed low rate for however many years you lock it in for.
But it also comes with a downside, which is: if things improve and you want to pay your loan off quicker, switch products, or switch lenders, you don’t have the flexibility to do so.
Indeed, breaking a fixed home loan can be expensive, often costing anywhere between thousands and tens of thousands of dollars.
Consideration 3: How low can they go?
The Reserve Bank of Australia (RBA) cut the cash rate to a record low of 0.25% in March – the second rate cut that month. RBA reaffirmed the cash rate will remain unchanged in July 2020.
Now, most experts believe this is as low as the RBA will go – and even RBA governor Philip Lowe has made it clear that he regards 0.25%, rather than zero, as the “effective lower bound” for official interest rates.
But that doesn’t mean the banks can’t drop their interest rates lower independent of official RBA rate cuts. As mentioned above, competition in this space has been heating up recently and lenders are all eager for a bigger slice of the pie.
When you might want to lock the rate in
All that said, there are times when locking in an interest rate may be the best option for you and your family.
The big one is if your circumstances have recently changed and you’re seeking some stability.
This includes if you’re starting a family and you’re going from two incomes to one. Or if you or your partner’s income has been affected by COVID-19 and you’re wanting to lower your monthly repayments instead of seeking hardship options.
Another key factor is if you can’t sleep at night because you’re worrying that rates will go up. That said, it’s worth noting that the RBA recently stated in March 2020: “the cash rate would remain at a very low level for an extended period”.
Update: RBA reaffirmed the cash rate will remain unchanged in July 2020.
Still on the fence? Give us a call
Like many things in life, when it comes to home loans, there’s no one-size-fits-all solution.
While locking in a fixed rate home loan may help you secure a lower interest rate during this time of instability, it also comes with a few drawbacks.
So if you’d like to find out if locking in a fixed rate is a good fit for you, give us a call. We’re happy to run through all your options with you – not just the one product!
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.