Fixed-Rate Loans Explained

With interest rates at an all-time low, taking the option of 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.

What is a fixed-rate home loan?

A fixed-rate home loan locks your home-loan repayments into an interest rate for a certain period of time. Home loans can be in a fixed-rate period for one, three, or five years. They then revert to the standard variable rate unless you decide to enter another fixed-rate term. When you decide to apply for a fixed-rate home loan, your lender will most likely offer you a rate lock. This means that the rate being offered with your loan will be fixed from the point of application not when your loan settles.

Fixed-rate home loans provide certainty

Depending on how you look at it, having a fixed monthly repayment is beneficial, especially if you are a type of person who prefers certainty. Having a fixed-rate home loan will allow you to organise your budget and stay on top of your repayments more easily because you know exactly how much you will be paying weekly, fortnightly or monthly.

You will be paying the same amount until your fixed rate period expires, your loan then reverts to a variable interest rate. At that time, you have the option to re-fix your loan, allowing you to take advantage of your lender’s new fixed rate. Otherwise, your loan converts to a variable-rate loan.

A fixed rate will allow you to budget more seamlessly

A fixed-rate home loan is perfect for first-home buyers those who have a strict budget, particularly those who are still settling other upfront expenses like moving costs and renovation. Having a fixed rate protects you from sudden rate hikes When the housing market is booming and wages are on the rise, it is more likely for the Reserve Bank of Australia to raise the official cash rate, prompting lenders to follow suit and raise their lending costs. There are other instances, however, when lenders make out-of-cycle hikes, especially when they are facing funding pressures. In such a scenario, having a fixed-rate home loan will let you breathe a sigh of relief. Should interest rates rise, you will remain unaffected. It is very practical to apply for a home loan when the lending environment is in a low-interest scenario. This way, you take advantage of a low interest rate even if rates suddenly rise.

A fixed-rate home loan allows you to save big

Having a fixed-rate home loan gives you the chance to save for a rainy day. With a fixed interest rate, you are not subject to any hikes, allowing you to save and allot your money for other expenses. As mentioned earlier, you can easily manage your finances given your fixed monthly repayments, allowing you to plan for any other future purchases without damaging your budget.

Things to consider

You have to do some research first if you want to experience the full advantage of having a fixed-rate home loan. One of the things you have to consider is the direction of the market. Usually, when banks are expecting future cash-rate cuts by the central bank, fixed-rate offerings are more discounted than the variable rate. Fixed-rate loans are more expensive when banks are anticipating a rate hike. The circumstances change when the official cash rate remains low while banks are making out-of-cycle hikes. In this case, it is best to consider seeking out the help of a mortgage broker to know your options. Fixed-rate home loans also have their own setbacks. There is certainly less flexibility when you avail of a fixed rate mortgage product. Since such loans are not affected by market movements, you won’t benefit from future interest rate falls. Some lenders also offer fewer features with fixed-rate home loans. Some do not offer offset accounts, while others charge extra when having a redraw facility. Lastly, fixed-rate home loans typically charge higher exit and switching fees, making it a struggle to refinance your loans.

Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of advice with regards to these matters.

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