When interest rates change- Home loan considerations

The RBA’s official cash rate is one factor that determines a Bank’s home loan interest rates. If the RBA changes the official cash rate, the Bank will consider whether to pass on the change to interest rates.

Choosing a home loan or refinancing in a changing rate environment can be a daunting task but we can help guide you through the considerations when interest rates go up or down.

Here are four considerations should there be an interest rate change:

• Refinancing: Evaluate if refinancing your home loan could offer better terms or lower interest rates
• Long-term goals: Align your loan choice with your long-term financial and lifestyle goals – like getting ready to purchase a home or investment property or making changes to your employment situation
• Lump sum payments: Consider making lump sum payments to your home loan reduce the principal amount and overall interest payable
• Budgeting: Revisit your budget to accommodate potential changes to your repayments.

If you already have a home loan, now might be the time to ensure you are getting the most out of your loan. CommBank home loans have the flexibility to change to suit your changing needs.

The interest rate on a fixed rate loan remains the same even if interest rates rise, while the interest rate on a variable rate loan can increase, meaning higher repayments if interest rates go up, or lower repayments if rates go down. A split loan can help to manage the risk of higher repayments in the future by letting you fix some of the loan and leave the rest variable.

The ideal type of loan for you in any interest rate environment is one that best suits your budget, income and lifestyle goals.

Here we step through the different options to consider and how they work.

Locking in a fixed rate loan

In a fluctuating rate environment, some borrowers prefer to lock in a fixed rate for a period of one to five years. This protects them against paying any future interest rate increases for the fixed, and period and provides certainty that their repayments will remain the same.

However, as interest rates are expected to fall in 2025, it is possible that if you opt for a fixed rate loan, you won’t benefit from the associated reduction in your repayments.

You may also be limited in how much extra you can repay off the loan during the fixed rate period and may not be able to access features such as redraw or offset accounts

Also, fixed rate loans are locked into a contract. There can be fees involved if you wish to break the loan for any reason, such as if you refinance or sell your property.

For these reasons, it may be preferable to consider a variable rate loan.

Opting for a variable rate loan

Variable rate loans can change at any time, usually in response to a change to the official cash rate by the Reserve Bank of Australia (RBA). Many commentators are predicting that the RBA will lower the official cash rate in February 2025, however any changes to the cash rate will be reflected on the RBA website.

Variable rate loans are flexible, and depending on the conditions of the loan, may allow you to do things like:

• Make unlimited extra repayments, to help you pay your home off as quickly as possible.
• Link to an offset account, so your savings can help reduce the interest payable.
• Change your loan or refinance at any time without any break fees or financial penalties.

While a variable rate loan can be more flexible than a fixed rate one, there are potential downsides. If your lender increases rates, your mortgage repayments will increase, too. Consider how your budget could be impacted if your mortgage increased by $100 per month, $500 per month or even more.

Splitting the difference

Alternatively, there is the option of a split loan, where a portion of your home loan is fixed and the remainder is variable. This can be the best of both worlds, offering both some degree of certainty but also the freedom to repay faster or redraw from the variable portion.

Deciding whether a fixed, variable or split loan is right for you is a big decision, and could have a significant impact on your future repayments and household budgeting if rates rise. To help limit the impact of rising rates you could consider making extra repayments or looking at other ways to pay off your home loan faster.