With the Reserve Bank of Australia (RBA) official cash rate currently sitting at historically low levels, many Brisbane residents are, no doubt, wondering what kind of interest rate (fixed or variable interest rates) they should choose in 2021. Is now the time to lock in a fixed low rate for as long as possible? Or, with the RBA unlikely to raise the cash rate in the foreseeable future, is this a good time to stick with a low interest variable rate? What are the pros and cons of fixed and variable interest rates? And how can you make sure you’re making the best decision to suit your needs?
What is the difference between a fixed and variable interest rate?
While most people have a vague understanding of the difference between a fixed and a variable interest rate (one changes and one doesn’t), many are still unsure of the specific details. For example, is a fixed interest rate fixed for the life of the loan or just for a short period of time? And will a variable interest rate remain unchanged so long as the official cash rate doesn’t move?
Understanding variable interest rates
A variable interest rate will move up and down in response to changes in the official cash rate. If the RBA announce they’re increasing the cash rate, lenders will typically follow suit over the course of the following week, raising their variable interest rates. But if the RBA drops the cash rate (as they repeatedly did in 2019 and 2020), lenders will start to lower their variable interest rate (which can deliver great savings on minimum monthly mortgage repayments). However, borrowers may be caught off guard if they think their variable interest rate won’t be subject to change as long as the RBA holds off on changing the official cash rate. Variable interest rates may move (up or down) in response to a variety of elements, including competition from other lenders, changes in lender costs and altered market demand.
Understanding fixed interest rates
Unlike variable interest rates, fixed interest rates aren’t affected by changes in the official cash rate. This means that you won’t have to worry about your minimum monthly repayments increasing for the duration of your fixed interest rate term (which can be reassuring for borrowers on a tight budget). But conversely, it also means you won’t see reductions in your minimum repayments, even if the RBA drastically lowers the cash rate. It’s also important to realise that a fixed rate comes with a fixed term (usually 1-5 years); after that, your interest rate will typically revert to the standard variable interest rate of the lender. A fixed interest rate home loan may also offer limited flexibility for making additional mortgage repayments.
Are fixed interest rates generally higher or lower than variable interest rates?
Traditionally, fixed interest rates have a reputation for being slightly higher than variable interest rates. However, 2021 has certainly not been a “traditional” year by anyone’s standards! In fact, 2021 has seen a big increase in competition amongst lenders as a growing number of homeowners are refinancing to access better mortgage deals. As a result, many lenders are now offering home loans with fixed interest rates that are lower than their variable interest rate products.
So, should you choose a fixed or variable interest rate in 2021?
If you’re looking for a home loan with a competitive rate that will ensure set monthly repayments over the next few years, then a fixed rate home loan could be an ideal solution. By locking in a fixed rate home loan now, you can ensure you’ll continue to benefit from a low interest rate, even if the RBA decides to increase the official cash rate sooner than expected.
However, when it comes to choosing between a fixed and a variable interest rate, it’s important to compare more than just the basic numbers. You’ll also need to think about the various features you want to be included in your home loan and whether there are any added fees or charges. To ensure you end up with the right home loan deal to suit your financial needs, make an appointment to speak with one of our expert mortgage brokers at Coronis Finance.