Fixed Rate Loans are home loans where the interest rate can be set for a specified period of time. Once fixed, your interest rate will remain unchanged for the term selected. This means that for the entire term your repayments will also remain unchanged. This provides you with certainty for a specified time. You can plan your household budget with the knowledge that your repayments on your home loan will not change until the end of the fixed period.
At Keypoint we advise our clients to choose fixed rate loans for certainty of repayments and not just because they think rates are going to rise. Fixed rate loans are less flexible than variable rate loans and trying to get out (also called ‘breaking out’) of a fixed rate loan before the prescribed term can be very expensive – in some cases at the cost of thousands of dollars. You really have to consider the duration you need the loan for, how fast you want to pay the loan off and whether you want to benefit from redraw or offset facilities to reduce your interest cost before making a decision to choose a fixed rate loan.
Fixed rate loans are traditionally available in 1, 2, 3, 4 or 5 year terms, but some lenders do offer up to 15 year terms (conditions apply).
Pros
The following are advantages related to most fixed rate loans:
- Loan repayments will not increase for the duration of the fixed term period while variable interest rate loans can.
- It allows borrowers to budget more effectively, over the selected fixed rate period, without the risk of loan repayments increasing.
Cons
The following are disadvantages related to most fixed rate loans:
- Loan repayments will not decrease for the duration of the fixed term period while variable interest rate loans will.
- Making additional or extra repayments may be limited. For instance, some lenders will only allow you to make an extra $10,000 in repayments (above your minimum loan repayments) per loan year anniversary.
- Many lenders don’t provide 100% offset against fixed rate loans.
- To refinance your fixed rate loan will incur break costs that can amount to thousands of dollars.
- Generally, you are unable to make any changes to your home loan options, for instance, changing your interest payment type.
- Long term fixed rates at low interest rates can make borrowers comfortable with their level of repayments. At the end of the fixed rate period, if rates have dramatically increased, borrowers need to ensure they are able to meet much higher repayments as a result.