The fixed rate home loan bubble has well and truly burst
Introduction
The world has changed immensely since the COVID-19 global pandemic began. The ways that we live, learn, work and relax have all been impacted. From the growth in online classes, to more flexible work programs, not all of these changes have been negative. However, Australia’s cost of living and interest rates are still working through the challenges of the pandemic. This, in turn, is impacting home loan rates – including many Australians whose fixed rate home loan term is coming to an end.
What is a fixed rate home loan?
A fixed rate home loan is a loan where the interest rate is set for a certain amount of time. Unlike a variable rate home loan, the changing national interest rate does not impact your loan repayments for the duration of the fixed rate period. This period is normally set between one to five years, and if paid off early may incur break fees.
Advantages and disadvantages of fixed rates
There are several advantages to fixed rate home loans. You will have no worries about changing interest rates (for the fixed period of the loan). This also means that your repayments will not fluctuate each month, making financial planning less complicated.
On the other hand, it is harder to repay your loan more quickly as you may end up with an early repayment or break fee. Furthermore, if interest rates decrease, you may end up being locked into a higher rate.
What in the world is going on?
During COVID-19 a large number of people applied for fixed rate home loans at a very low interest rate – fixed at approximately 1.99%.
As a consequence, many new homeowners on a fixed rate home loan have been paying interest at a record low.
However, since COVID, interest rates have crept up to a shocking 5.89%.
This means that those coming off a fixed rate home loan onto a variable rate will be hit by an increase of almost four percent to their loan repayments.
What would this look like?
An example of this would be someone who had borrowed $400,000 at the height of the COVID-19 pandemic for a new house. At this point in time, their monthly repayment would be $1,693.
Now, as their fixed term ends and they move onto the variable interest rate, their repayment almost doubles to $2,550 per month.
How this will impact you
If you are on a fixed rate home loan, it is worth noting whether or not the fixed period is soon coming to an end. If it is, high interest rates may soon significantly increase your monthly loan repayments.
What you can do
The best thing to do is to take a look at your home loan, and whether it is fixed or variable, and the impact interest rates are having on your home loan repayments and your financial welfare.
If you or someone you know is in a situation like the article’s example, it is best to speak to a mortgage broker to review your home loan.
If you are worried about being in a fixed rate home loan, or in a variable home loan, it is also worth talking to a broker.
Conclusion
As interest rates and inflation peak, it is more important than ever before to be financially aware. Part of this is understanding what kind of rate your home loan repayments are determined by, and what you can do to make it work in your favour. If you have any questions or concerns, feel free to reach out to the team at AA Finance Solutions for help and advice.
