Amid the ups and downs of the current home loan market it can be difficult to decide if looking into a fixed rate home loan makes sense, fixed interest rate home loans are home loans that lock in the interest rate of your home loan so that your repayments don’t change for the period selected.
Typically the home loan is for a period of between 1 and 5 years.
When the fixed period expires you can choose to re-fix again, roll-over to the lenders Standard Variable Rate for the remainder of the loan term or refinance to another lender for a better rate.
This is one of the most difficult decisions home loan borrowers are faced with. If you are in this situation, it is important for you to educate yourself on what fixing your home loan means for your future repayments, of course, everyone wants to save as much as they can on their home loan. The choice is ultimately yours.
What are the benefits of Fixed Interest Rate Home Loans?
Fixed interest rate home loans offer financial stability, they provide you with the security of knowing exactly what your repayments will be for a given period of time, giving you peace of mind and the ability to budget. A fixed rate home loan can be advantageous if variable interest rates rise.
Fixed Rate Home Loan – Knowing when to Fix
Choosing the right loan is a great start, but what is the point if you lock yourself in when interest rates are high only to see the reserve bank cut interest rates?
By fixing when interest rates are low you will protect yourself from potential financial market volatility.
Most people however fix when rates are high, fearing that they could go even higher, not out of a rational decision to look at the overall term of the loan and what rates are likely to average over that entire period.
Remember 3 or 5 years is a very long time!
Fixed Rate Home Loan – Why not to Fix
Fixed home loans can have high exit fees called “economic break costs” or do not allow you to make large additional repayments.
A fixed home loan is a contract, if you break the contract you will have to pay the bank any loss that they incur, this amount could be considerable, depending on the size of your loan, the term remaining of the fixed home loan and the difference between interest rates when you took out the loan and the current interest rates.
DO NOT fix your rate if you are planning to:
- Sell your property
- Make a large lump sum repayment
- Refinance your home loan
Applying for a Combination or Split Rate Home Loan may help if you are planning to make extra repayments, however this will not help if you are selling or refinancing as you would still incur large exit fees.
Can I make extra repayments?
Yes you can, but be aware that there are restrictions placed on the amount of extra repayments you can make and each lender’s criteria is different. For example:
- ANZ: $5,000 per annum
- CBA: $10,000 per annum
- NAB: $20,000 during the term of the fixed rate
So the difference between CBA & NAB over a 5 year loan could be $30,000 in allowable extra repayments. Of course, there are many more lenders, but all but one or two have restrictions of a similar nature.
What else should I Consider?
The interest rate that applies to a fixed rate home loan is the rate that applies on the day that the bank applies the changes to your existing loan or the day that the loan is advanced, if refinancing or settled if purchasing. Great news if rates go down but hardly what you were looking for if rates go up.
By paying a Fixed Interest Rate Lock in Fee you can secure the rate that applies on the day of your application. This fee ranges from $395 to $695 to 0.15% of the loan amount, by doing this you are protected from rate rises.
Rate lock is generally available for a maximum of 90 days (depending on the lender).
There are however several lenders that lock the rate in at application for free for a fixed rate home loan.