Fixed rate home loans offer a solution for borrowers wanting certainty with their rates and loan repayments. Unlike the variable rate home loans where rates are subject to change based on the market rate movements, for fixed rate options, interest rate will not change during the fixed period. You can choose a specific term you want to fix your interest rate at. Generally, the fixed rate options are 1 to 5 years.
What are the benefits?
Fixed rate loans provide certainty with your loan repayments. Since your interest rate will not change for the duration of your fixed rate term, you know exactly how much you will need to pay each month without having to worry about interest rates going up and your loan repayment changing.
Fixed rate loans protect you in a rising interest rate market.
Option to lock in your rate for up to 90 days. Your interest rates are subject to change and is not guaranteed until the day of your settlement. So, if the rate happens to change just before your settlement, your loan will settle on the new rate. Especially in a rising interest rate market, this option comes handy as you will have guaranteed rates for up to 90 days. There is a fee to do rate lock and this is dependent on the lender. Some lenders charge between 0.10 to 0.15% of the loan amount whilst some lenders might have a fixed fee between $300 to $800.
Example of how a fixed rate loan can be suitable for you
A client purchased a new home to live in for $600,000 and they need a loan for $480,000. Client advised that what’s important to them is they want the certainty of repayments for the first 2 years because after buying this property they won’t have much savings left so they want to focus on building up their savings again. Fixed rate option will provide this solution for the client because they will have a fixed loan repayment amount for the duration of their fixed rate term as well as the peace of mind that they don’t have to stress and worry about the interest rates going up. By knowing exactly how much will be going out each month, it will help them with their budgeting and work out how much they can put away into their savings.
What you should consider or be aware of
Less flexibility. Fixed rate loans generally have a limited amount of extra repayments you can make during the fixed rate term. For e.g. some lenders have a cap on the extra repayments to $10,000 per year. If you exceed the maximum limit, lenders may charge you an early repayment fee (also known as Break cost). They may also charge you a break cost if you refinance your loan or sell your property during the fixed rate term.
You may not be able to redraw the extra repayments you have made into the home loan during your fixed rate term if you need to access them in the future. To access your funds, you will need to break the fixed rate agreement and may be charged the break cost.
You won’t benefit from future rate reductions. No one can predict what rates will be in the future however if rates start coming down and you are on a fixed rate loan, you’re locked in at a higher rate.
How much is the break cost?
Break costs are unascertainable as it is dependent on the difference in the wholesale rates between the time when you applied for the loan and when your loan is repaid.
Each lender has their own formula when calculating the break cost so it is recommended that you contact your lender prior to paying out the loan or if you want to make a lump sum payment into the loan.
Can I get an offset account?
Majority of the lenders do not offer an offset account for a fixed rate product. However, there are some lenders that offer this.
What fixed rate terms are available?
Generally, lenders offer fixed rate terms between 1 to 5 years however there are lenders that offer longer terms as well.
What happens after my fixed rate period ends?
Once your fixed rate period ends, your loan will automatically revert to a variable rate loan based on the standard rate at that point in time less any discount mentioned in the loan agreement (if applicable). It is recommended that you or your broker contact the bank/lender prior to the fixed rate expiry to negotiate for your best rates as well as reviewing your options to ensure you are on a suitable product based on your needs and requirements.
Do I have to fix my loan completely?
No, you don’t. You have the option of splitting your loan to a part fixed and part variable loan. This allows you to take advantage of both worlds. Fixed rate for the certainty of repayments and variable rate for the flexibility of making unlimited extra repayments or using a 100% offset account. In addition, it allows you to manage the risk of the uncertainty with the interest rate movements by keeping some of your loan fixed and some variable. You can choose the split ratio according to your risk appetite.
