According to Graham Cooke, mortgage expert at Finder, a bit of both might be the best option.
“It’s a good idea to split your home loan into two parts,” he says. “The first is a variable component, where you have a mortgage offset account to offset the interest you pay.”
“Then, for the principal component of your loan, find the lowest fixed rate possible and go for it. It’s a good way to reduce the interest you pay and protect yourself from future rate increases.
However, for homeowners who don’t have significant savings to put into an offset account, Cooke says it might make more sense to repair the entire loan, so there’s certainty about the repayments as rates rise.
According to Finder, first-time homeowners are likely to be among the hardest hit by rate hikes because they tend to be younger and have less stable incomes. A recent survey by the company found that more than two-thirds of first-time homeowners worry about meeting their mortgage payments once rates rise.
Another benefit that can ease the shock of higher mortgage payments is the many, often generous, repayment offers offered by lenders. RateCity data shows that some lenders are offering up to $5,000 in cash bonuses for refinancing, which can help build a reserve of savings against higher payments.
However, these deals sometimes look better on paper than in practice, says Sally Tindall, research director at RateCity. “Before jumping on a cash back offer, do the math to make sure you’re actually getting a good deal once you factor in the rate, fees, and transfer costs,” she says.
“A few thousand dollars in cash may seem like a dream come true, but if you pay a higher rate for this privilege, you could find yourself behind within a year or two, potentially even faster if you have a large loan. ”