Most lenders responded to the recent RBA rate drop by reducing their fixed rates. With interest rates now at an all-time low, and fixed rates often coming in lower than their variable counterparts, locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive.
However, it pays to know the ins and outs of fixed-rate loans before committing to one, particularly if you are looking to take advantage of the longer fixed-rate terms on offer.
When purchasing a property, refinancing or just renegotiating with your current lender, borrowers can generally decide between fixed-interest loans that maintain the same interest rate over a specific period of time or variable-rate loans that charge interest according to market rate fluctuations.
Firstly – let’s cover the basics of a fixed-rate home loan.
- Fixed rates are an interest rate you agree to for a specific period of time – for example, you agree to an interest rate fixed for a 24 month period.
- Fixed rates are available from 1 year, right up to 10 years with some lenders (however 1-5yrs seem to be the most popular).
Fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed-rate period.
However, locking in the interest rate on your home loan can offer stability. For the budget-conscious, a fixed rate can give protection from potential rate movements and changes in repayments.
Further to this you can “lock-in” a fixed rate, so you know what interest will be applied at settlement. This generally incurs a fee and lasts for a maximum of 90 days.
If you choose not to take up a rate lock, the rate that is applied at settlement will be whatever rate is on offer at the time. This allows the borrower to take advantage of drops in the fixed rate between applying for and settling a loan.
In addition, borrowers should consider the possibility of arranging a ‘split’ loan. This option allows you to split your loan between fixed and variable rates – either 50/50 or at your own desired ratio, depending on your future needs. This can allow you to take a fixed interest rate for up to 5 years on a portion of your loan, while the remainder is on a variable rate which may give you more flexibility when interest rates change and potentially minimise the risks associated with interest rate movements.
Also, be aware that at the end of the fixed-rate term, your loan agreement will include information about how the loan will then be managed by the lender, usually to a ‘revert’ variable rate – which may not be the lowest the lender offers.
If you would like to explore your fixed-rate options; please get in touch today!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).