Homeowners and future home buyers often consider fixing the interest rates on their home loans - and with concerns about inflation and rising living costs, this has become a hot talking point once again.
Fixing your interest rate means that you will know what you will pay on your bond each month, irrespective of where we are in the rate cycle - but is this the right option for you?
Unfortunately, there is no simple answer as each person's financial situation is unique and will need a careful and thorough evaluation to ensure they make the best decision for themselves.
When applying for a home loan, it is by default on the basis of a variable interest rate. Once your bond has been registered, you can apply for a fixed interest rate, and there is a time limit attached before the offer lapses.
To help you decide on the most suitable interest rate option, consider these factors:
Understand the repo rate and prime lending rate.
The repo rate is set by the Reserve Bank and indicates the rate at which they loan to commercial banks.
This is not the same as the prime lending rate, which is the rate at which banks lend to consumers. Banks have running costs and other expenses which, when calculated with the risk of loaning money, result in the prime lending rate. The interest rate banks offer depends on your credit profile - including whether you have maintained regular payments - and affordability.
Currently, the prime lending rate is 11.25%.
Fixed interest rates are set for up to five years maximum which means that on a 20-year loan, you will need to renegotiate the terms, and these terms could be less favourable than they were before.
Generally, a fixed interest rate is higher than a variable rate as it poses more risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.
Loan repayment period.
The longer the loan repayment or amortisation period, the larger the influence a change in the interest rate will have on your repayments.
Bond originators can apply to more than one bank on your behalf to secure a lower interest rate or a rate concession. By approaching more than one bank, MyProperty Home Loans is able to negotiate a better rate concession as the banks compete to offer the best deal based on the buyer’s risk profile. Banks determine this risk differently, which affects the rates concession each will offer.
While understanding the market is important, you must also ensure you can afford your repayments. Apart from evaluating your financial situation, you might also need to consider downsizing your home. While this might not be what you want to hear, the stress and the lasting impact on your financial wellness are not worth staying in a home you cannot afford.