Should I repair my mortgage in 2022?

With the Reserve Bank of Australia (RBA) set to raise the cash rate as early as August this year, is 2022 the right time for Australians to lock in a fixed mortgage rate, even before further hikes?

Over the past couple of years, a plethora of everyday Australians have jumped on the house bandwagon despite high house prices, to take advantage of some of the lowest fixed mortgage rates and most competitive in the country’s history.

Why did this happen? Well, you could say it’s all down to the RBA’s historically low interest rates – the official exchange rate sits at an all-time high of 0.10%. However, now that the RBA is signaling a possible hike in the not too distant future, we can well expect to see interest rates on many fixed home loans (both long and short) increase across the board.

While it’s often notoriously difficult to predict the housing market, the low fixed rates we’ve seen throughout 2021 may no longer hold sway in 2022, especially as price growth real estate seems to be slowing down globally.

With all of this in mind, the question remains: is 2022 the right time to fix your mortgage?

A fixed home loan has a set, unchanging interest rate for the term of the fixed rate, which can give you peace of mind that the amount of repayment required will be the same during that initial period.

In most cases, at the end of the fixed term (usually one to five years), your loan will instantly switch to a variable rate, unless you agree with your lender to repeat the process in ” renewing” the fixed term.

If you choose to make changes to your loan agreement during this time – for example, choosing to break a fixed rate home loan early – you may be subject to fees such as a break fee.

Depending on the size of your loan, interest rate fluctuations and loan terms, these fees can easily add up to thousands of dollars.

Whether it is better to have a fixed or variable rate loan, it is entirely up to the individual to make their own risk assessment based on their own personal circumstances and how changes in the market may impact their its ability to make repayments.

From an interest rate perspective, fixing your home loan this year could potentially save you more money than if you were to choose the variable rate option. Simply put, the reason for this is that the federal government influenced lower fixed rates by issuing discounted three-year government bonds to banks that reduced their fixed rates relative to floating rates. Indeed, it could allow banks to offer fixed-rate loans at a lower cost than they would otherwise have – perhaps on a par with how fixed-rate loans appeared in 2019. Canstar data shows that many lenders have increased their fixed interest rates over the past few years. months, but at the time of this writing, shorter-term fixed rates still tend to be cheaper on average than a typical variable-rate loan.

However, getting a fixed loan is not always the right option for everyone, especially in this turbulent economic climate. Fixed mortgages are generally less flexible and often don’t allow for additional repayments, meaning they’re not always positive for all Australians. Also keep in mind that if a lender cuts their interest rates, you won’t benefit from those cuts while you’re on a fixed rate home loan.

Securing part of your loan with a split loan is also a viable option that can still provide partial protection against sudden rate hikes and arguably gives you the best of both worlds: the stability of a fixed rate and the flexibility of variable rate.

There are several reasons why some Australians opt for a fixed rate, rather than variable or split options. These include:

• If interest rates are low, you can lock this in and ensure you are protected if interest rates suddenly rise for the term.
• You have predictable payments each month, which can help you budget effectively and control your repayments.
• Your minimum repayments will not change for the duration of the agreed fixed term.

On the other hand, some of the reasons borrowers may prefer an adjustable rate home loan include:

• Moneysmart notes that variable loans tend to have more features than fixed loans – for example, clearing accounts and withdrawal facilities tend to be more common on variable loans.
• It may be easier or cheaper to switch loans in the future if you have a variable loan.
• Depending on the fixed term(s) and products you are considering, a variable rate may be cheaper in the short term.

Most providers allow you to choose the period you want to fix your interest rate, which can usually be between one and five years and can depend on the total amount you are borrowing and the other terms of the loan.

How long the rate is fixed for is entirely up to the individual and what they can afford, but it is important to remember that interest rates vary depending on the length of the term you are fixing for. Generally, the longer a loan is fixed, the more interest you can expect to pay for the security that comes with locking in a home loan rate.

While some banks and home loan providers have already started to raise their fixed mortgage rates, many Australian buyers may well think it’s time to fix their rates, perhaps looking to get in before it’s over. too late and out of reach in terms of affordability if interest rates were to rise further.

If you’re interested in switching to a fixed loan, it’s important to weigh your options and do your research on the rates available from banks and home loan providers. You may also choose to use a mortgage calculator to determine what the loan change will cost you and its potential impact on your repayments.

Chad Hoy Poy is the National Lending Manager at WLTH, who has 15 years of experience in leadership, account management and business development within lenders and finance companies. He is interested in discussions about growth, helping start-ups achieve commercial success, and using technology to its potential. You can find Chad on LinkedIn.

Cover image source: Dean Drobot/Shutterstock.com.

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