Don't rule out fixing your home loan

IF you're thinking of fixing your loan, it may be possible to lock it in and save money, with fixed rates costing less than standard variable rates.

Don't rule out fixing your home loan

IF you’re thinking of fixing your loan, it may be possible to lock in and save money, with prevailing fixed rates costing less than standard variable home loans and the prospect of more interest rate rises on the horizon.

Fixed-rate loans accounted for 24 per cent of all home loans taken out in March, according to the Australian Bureau of Statistics. The proportion of loans fixed is well up from the 16.6 per cent average in 2006 and reflects borrowers fleeing to the security of fixed loans after seven interest rate rises in two years.

If you like certainty, a fixed loan could be for you. You'll know what your home loan repayments will be during the term of the loan and they won't go up.

But you will only achieve an interest-rate saving with a fixed loan if interest rates keep on rising during the term of the fixed loan.

The best time to fix is before interest rates start rising. Given interest rates have already risen seven times in two years, the best time to fix is probably behind us. But that doesn't mean that you can't still save money.

With ANZ Bank last week predicting two more official rate rises this year, variable home loan rates could keep rising to over 10 per cent this year, or next, so it might be worth considering whether to fix part or all of your home loan.

Looking at the numbers

According to data from the Reserve Bank of Australia, average interest rates on variable home loans were 9.45 per cent in April, well up on 8.55 per cent in December.

Variable home loans rates sat well above the average rate on three-year fixed home loans of 8.95 per cent, according to RBA data.

That means you'd be paying less now on a three-year fixed loan than on a standard variable home loan.

A quick look at interest rates on five-year fixed loans also reveals interest rates of 9.10 per cent or less from the big banks, well below standard variable rates.

Be aware of some costs

But you also need to be aware that it may be very expensive to exit a fixed loan so ask about any costs.

In addition, banks usually limit extra repayments on fixed loans, which could otherwise help you to reduce interest costs, and fixed mortgages may also limit or attract high rates for redrawing.

Most fixed loans don’t have offset facilities, which are common on variable loans and allow you to cut interest costs substantially by allowing the balance in your savings account to offset your home-loan balance, thereby cutting interest charges.

If you do want the security of fixing your loan, but don't want to take the risk that rates will fall, then splitting your loan into fixed and variable portions could be a good idea. That way, you can balance your risks and get some certainty into your home-loan repayments.