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How to know when is the best time to fix your interest rate

by Lee Naismith

30 Jun - 2013 - 12:00 AM

Tags: fixed rates refinance refinancing


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I have been flooded with phone calls and emails asking me if the best time to fix my interest rate is now.

Fixed rates are very attractive at the moment and with most of the fixed rates lower than the current variable rates it certainly does make good sense to seriously consider a fixed rate loan.

Having a fixed rate gives you peace of mind knowing that while your loan is on a fixed rate that your repayments will remain the same throughout the fixed rate period. There is however a downside of taking out a fixed rate loan which also needs to be taken in to consideration when contemplating fixing your loan.

Generally you are limited in being able to make additional repayments above your normal repayments. You may not be able make any additional repayments or limited to $10-20,000 p.a (this will vary from lender to lender) or a certain amount per month without being charged a penalty. You may also lose your ability to redraw any extra repayments you have made until the fixed rate has expired.

If you decided to payout your fixed rate loan or contribute additional repayments above what you are allowed, your lender may charge you a penalty for doing so. Whilst the government banned early repayments fees on home loans this does not apply to penalties for paying back your fixed rate early. This is commonly referred to as fixed rate break costs.

The other question that I am commonly asked is that "if I fix my rate now and decide to pay it out in 1-2 years’ time what will be the penalty for paying back early." Good question, however this is very difficult to determine. Basically the way in which the banks determine the early payment penalty is based on the difference between what the current wholesale lending interest rate is compared to the fixed interest rate your loan is on at the time that you are looking at paying back early. They then multiply this over the number of years you have left to run on your fixed rate and how much you have borrowed – I know this sounds a little complex but it is basically how much the banks stand to lose in $$$ terms should you pay back your loan early.

The wholesale interest rate is what the banks get their money for and is not their current advertised variable rate for example, if a person has a $300,000 home loan, fixed it for 3 years at 8.00% and has 2 years remaining they could be up for significant break costs. If the wholesale mortgage rate for bank XYZ was 4.00% the break costs would be around $24,000.

You can generally fix your rate for anywhere from 1-5 years so when fixing your interest rate you need to consider not only the interest rate that is on offer but how long you intend on keeping the loan.

Another thing you could also consider is fixing some of your loan and keeping the rest on a variable rate. A bit like hedging your bets – you have comfort of knowing that some of your loan is fixed and you still have some of your loan on a variable rate that offers flexibility.

Choosing to fix or not to fix will depend on your individual needs and requirements and your own individual circumstances so before jumping in, run it past a qualified mortgage broker or follow our link below for a detailed report on your situation.

Access One’s mortgage refinance report, was created to help you compare your current mortgage to other available rates and lenders. It’s a great way to find out if refinancing today can help you achieve your goal – whether it’s a lower monthly payment, pay off your mortgage faster, or trading a variable for a fixed loan.

Get started here with a Home Loan Comparison


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