With interest rates at an all-time low, and many lender’s fixed rates lower than their variable options, 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.
When purchasing a property, refinancing or just renegotiating with your current lender, borrowers can generally decide between variable-rate loans that charge interest according to market rate fluctuations or fixed-interest loans that maintain the same interest rate over a specific period of time.
Fixed rates are locked in for an amount of time that is prearranged between you and your lender.
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.
Knowing that your lender will offer a fixed-term fixed interest loan provides peace of mind for those borrowers looking to budget precisely rather than be susceptible to interest rate fluctuations over the medium to long term.
There are some lenders that offer seven-year or 10-year fixed terms, but generally one to five years are the most popular.
When you apply for a fixed rate, you can choose to pay a fixed rate lock-in fee also known as a ‘rate lock’, which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate.
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 some other ratio. This can allow you to ‘lock in’ 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. It will also allow you to make extra repayments to the variable rate loan without any penalty. 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. It always best to review your loans at that time to ensure that the loan structure is still competitively priced and meets your needs and objectives.