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As the name suggests, fixed rate home loans are fixed on an interest rate for a certain period of time – generally up to 5 years. You’ll find most banks, credit unions, building societies, mortgage brokers and Australian lenders offer fixed rate loans.
These home loans are reliable. You know exactly what your repayments are and your interest rate doesn't change for the period of your fixed rate term. Four key things to know about fixed rate home loans:
Again, the name’s a bit of a giveaway. A variable rate home loan means that you repay your home-loan at a variable interest rate. So, the interest rate can keep changing, depending on what’s happening in the market. Three key things to know about variable rate home loans:
There isn’t a yes or no answer to this one. It really depends on your unique situation and also what’s happening in the market. But, if you like to plan ahead and want a certain level of stability, a fixed rate home loan might be suitable for you. For example, a fixed rate home loan could be great for a growing family who need to keep a close eye on their savings, or a first home buyer who’s dealing with the costs of renovations and moving.
It depends on your lender, but some lenders may allow you to split your loan between fixed and variable interest rates. This means you’d be able to assign a certain portion of the loan – say, 50% – to the fixed interest term, while leaving the rest variable. This may allow you to tap into some savings through the variable portion of the loan if the Reserve Bank of Australia (RBA) reduces the official cash rate and your lender follows suit with their interest rates.
There are a number of possible advantages to fixed rate mortgages, including:
Some fixed rate home loans are locked in for 5 years. So you don’t want to work out half- way through that it was the wrong choice. Before signing up, make sure you consider some of the potential disadvantages:
If you choose to refinance before your fixed period ends, you may be subject to break costs. Get in touch with your lender to find out how much you’ll have to pay.
Purchasing a home is one of the biggest financial decisions you will ever make so it’s important to choose a home loan that suits your financial situation, preferences and most importantly, your financial goals. If you are someone that likes certainty and the ability to plan ahead, then you could benefit from the stability a fixed rate home loan provides. Fixed rate loans are great for helping you stick to a budget, however it is also important to be aware of any limitations or penalties, particularly around extra repayments and break fees.
Banks don’t like it when you mess with your fixed rate contract. If you switch back to a variable rate, close your loan account, or make a larger loan repayment than normal, you may find yourself having to pay a fee to the bank. These fees are usually called “break fees”, but are also known as an economic cost or early repayment adjustment.
When you apply for a fixed interest rate, you’ll typically be offered a rate lock, which locks in that rate but can incur a rate lock fee. If you do employ the rate lock, your rate won’t change. However, your rate may vary between application and settlement if you don’t accept the rate lock.
When you sign on to a fixed rate home loan, you’re usually locked in at that interest rate for around 1 to 5 years. Once this term finishes up, you’ll have to either sign on to another fixed term contract or jump ship to a variable interest rate loan. The interest rate your loan reverts to after the initial contract period ends is also called the standard variable rate.
Before deciding on a fixed home loan, you should check with your lender if there are any restrictions. Some of these may include:
This really depends on your unique situation. Some people fix their entire loan. This is quite common for property investors, as most of them don’t make extra repayments. Other people calculate how much they’ll pay off on their fixed home loan over the term, and then keep that portion of their loan variable to provide a level of flexibility. There’s not really a definitive answer to this one. It’s beneficial to look at your current situation and also consider what might happen in the future before making the decision.
Typically, the longer you fix your loan, the higher the premium. Essentially, you’re paying for the security of a fixed interest rate. That’s why you want to make sure you’re fixed on a good one! It’s common to pick a 3 or 5 year fixed home loan rate, but you should really base this decision on your own situation.
So, you’re on the hunt for a fixed rate home loan. What kinds of features should you look for?
Finding a suitable home loan can be a bit of a daunting task. Especially when you know you might be locked into a contract for a few years. The best thing you can do is to research and compare a whole range of loan products. If you don’t want to do that bit by yourself, good news is iSelect has partnered with Lendi to do it for you! View your loan shortlist by hitting the button here, or give Lendi a call on 1300 186 260 (08:30-18:30).