Do I stay variable or switch to a fixed interest rate?

Over the twelve months to June 2023, there were eleven interest rate rises in Australia, resulting in an overall cash rate of 4.1%. Even with the small number of recent rate reductions, many people are now looking for the stability of a fixed rate. However the current fixed rates have been pretty fluid and trending upward, meaning this isn’t necessarily a guaranteed way to get a cheaper rate. The trickier part too is predicting whether rates will go up or come down and if fixing, what period to fix for.

So what do these rate rises mean for your home loan? Do you run the gauntlet and stay variable or do you fix? Well, there are pros and cons of both options – and it will always depend on your personal needs and circumstances.

It’s essential to do your due diligence and consider the following benefits and downsides.

Variable interest rate

Pros:

• Flexibility and wider range of repayment options
• Generally easier to refinance without additional break fees
• If interest rates drop, so do your repayments
• Ability to pay more on your loan than your monthly repayments without penalty
• Can have 100% offset account so you pay less interest

Cons:

• If rates rise, your repayments will also rise
• Less financial certainty

Fixed interest rate

Pros:

• Rate rises won’t impact your repayments
• Locking in your rate generally means it’s 'set and forget' and therefore easier to budget and manage cash flow

Cons:

• Less repayment flexibility, as you are capped at a certain amount per year
• Fewer features than a variable rate home loan, such as redrawing funds
• You will not benefit from rate cuts
• There could be break costs if you wish to leave your loan earlier
• Many lenders don’t have access to an offset account on fixed (although Credabl does!)

If you do want to lock in your rate and have comfort in knowing what your monthly repayment is going to be, Credabl has access to a fixed-rate offset loan that could provide you with the benefit of shortening the length of your loan by reducing the amount of interest you are charged, for example.

Remember, there is no crystal ball when it comes to interest rates, which is why it’s valuable to take the time to actively – and seriously – review your home loan on a regular basis.