Tired of rate hikes? Here are your home loan options

After a lovely dry spell, inflation has driven the Reserve Bank of Australia (RBA) to hike rates again – making variable rate home loans more expensive.

Before the November rate hike, the average home loan interest rate for owner-occupiers was 6.61% in the Mozo database. Now that 65 of the lenders we track have announced increases to their rates, the average is now 6.77% – a mere two weeks after the RBA decision. And that’s the average.

There might be more rate hikes on the horizon, too. Every rate rise adds more interest to monthly repayments and piles on the mortgage stress already felt by Aussies. Yet despite the strain, inflation proves dogged.

So what options do home loan borrowers have to avoid rate hikes altogether? Let’s run through the pros and cons.

The most obvious way to avoid RBA rate hikes is to fix your interest rate. Fixed home loans offer one interest rate for a period of time, called a ‘fixed term’ (usually 1-5 years, though some go as high as 7). 

A fixed rate home loan can take the pressure off your budget by guaranteeing consistent mortgage repayments for a while, but before you fix, keep in mind these three crucial cons:

• Fixed rate home loans can be harder to refinance since there are break costs associated with ending a fixed term early. 
• You miss out on savings when variable rates drop – and rates may drop as early as December 2024, which is within the time span of the shortest possible fixed term.
• Fixed rate home loans usually have fewer features, such as offset accounts.

Talk to a financial adviser to see if fixing could be the right solution for you.

Want some of the consistency of fixed rates but love the features of a variable rate? A split rate home loan could be the way to go. 

With a split rate, part of your interest is fixed, and part of it is variable. You can choose the proportion of either. For example, 70% of the interest rate could be fixed while the remaining 30% varies with the RBA. 

The main advantage of a split loan is that it’s a partial shield from rate hikes. This could ease some of the uncertainty while giving you the flexibility to enjoy savings when interest rates come down. 

That being said, your split rate won’t drop as much as a pure variable rate, either. This is where a financial adviser – and a mortgage calculator – can help you crunch the numbers.

Several home loan lenders are trying to innovate ways to deal with the rate hike mortgage crisis. For example, Up Home lets you have up to 50 offset accounts, meaning all your various savers could save you on interest. For refinancers, Unloan comes with an interest rate that drops by 1 basis point every year for up to 30 years over the life of your loan. 

Even smaller players like Northern Inland Credit Union have thrown their hat into the ring with unique features to save. NICU’s Capped Home Loan is a variable rate home loan with a cap of 6.04% p.a. (6.39% p.a. comparison rate*), meaning even when rates rise, they won’t go higher than that maximum or ‘capped’ rate.

All of these loans come with pros and cons, as well as T&Cs, fees, and limits. The point is to do your research, however – there might be more money-saving options than you think.

Refinancing is a classic option for dealing with home loan pain, and many Aussies have taken it up. The value of refinanced home loans hit $18.5 billion in September 2023 – 1.5% higher compared to a year ago, according to the latest lending indicators from the ABS. 

Refinancing can be a stressful process: you essentially have to qualify for a home loan all over, which means tightening up your spending, checking your credit score, and calculating your borrowing power. 

It’s essential to ask yourself some key questions about refinancing, too. What don’t you like about your current lender? Is it just the interest rate, or is it everything? Knowing what isn’t working for you can help you narrow down your home loan comparison search.

If you still like your lender but just need some ways to bring down the cost of your monthly repayments, there are some classic tactics to take. Namely:

• Call your lender to negotiate.
• Fill up your offset accounts, if you have them.
• Make free extra repayments if you can – bonus points if you have a redraw facility.

Interest-saving features exist for a reason, so now’s the time to use them. 

Compare low rate home loans in the table below.