FIXED RATE HOME LOAN

A fixed-rate home loan locks in the interest rate (and loan repayment) for a set period, usually between 1 to 5 years. At the end of the term, the fixed loan automatically returns to the standard variable rate in the market. You can then choose to fix your home loan for another set period again, and so the cycle continues.

When it comes to interest rates, this type of loan tends to follow the pattern of the cash rate set by the RBA. If a lender expects the cash rate to increase, the fixed rate will generally be higher than the variable rate. On the other hand, if the cash rate was expected to fall, the fixed rate will generally be lower than the variable rate at present.

Fixed-Rate Home Loan Limitations

Although fixed-rate home loans provide certainty on repayments, there are some limitations that need to be considered before making the decision to fix your home loan.

1. Most lenders will not provide the ability to link an offset account to offset the interest on your home loan
2. Although additional repayments can be made, these additional repayments are generally limited (most lenders will allow $10K per annum) and these additional repayments cannot be accessed until the end of the fixed-rate period.
3. Once your rate has been locked in, if you need to terminate the fixed period early, lenders will charge an early breaking fee, and depending on the length of time remaining on your home loan, could end up costing thousands of dollars

Pros

• You know exactly how much to pay each time, making it easier to plan and budget.
• Your repayments won’t be affected by an interest rate rise.

Cons

• Your repayments won’t reduce from a fall in interest rate.
• You may face early exit fees for breaking the loan.
• Not as flexible as variable home loans.

Is a fixed rate home loan right for me?

If there’s one thing we know for certain, is that no one really knows how the market will change in a year, or even in a few months’ time.

If you are thinking of going down the fixed-rate option, compare it with the variable-rate to see what the difference is before you decide. If the fixed-rate was only slightly higher than the variable rate, and you anticipate an interest rate rise, then that could be a good opportunity to fix your rate.

Likewise, if the fixed rate was lower than the variable rate, and you predict that the interest rate will stay the same for a while, then that may be another reason to go for this option.

Can’t decide between a fixed or variable home loan? You can opt for a split loan and get the best of both worlds. You can have a 50/50 (or a different ratio like 70/30) split between fixed and variable rates.

A split loan gives you the flexibility of variable loans and allows you to take advantage of interest rate falls. The fixed component of your loan will also insure you against interest rate rises.