Looking at fixed rate home loans so you can have the peace of mind of stable mortgage repayments? Find out the essentials of fixing your home loan and how to get a good deal on a fixed rate loan.
Why Choose a Fixed Rate Loan?
Variable rate home loans are usually cheaper and offer the most flexibility. So, why would you choose to fix your home loan?
The primary advantage of a fixed rate is that you are protected from interest rate hikes. With a variable rate loan, if interest rates go up, your mortgage repayments will rise as well. If your budget is already stretched thin, this can be difficult to deal with.
With a fixed rate, your mortgage repayments will stay the same for the full length of the fixed period because your rate won’t change. Whether market rates go up or down, you can count on a stable rate and predictable repayments.
This doesn’t just offer welcome financial stability. It also makes it a lot easier to plan for the future and to budget. You can look ahead and work around your fixed mortgage repayments to reach other financial goals.
How Long Should You Fix Your Home Loan For?
You can fix your home loan for anywhere from one year to the entire length of your loan but most fixed-rate loans are for between 1 and 10 years. The most common fixed rate home loans are 3 and 5-year fixed loans.
Deciding how long to fix your loan for can be challenging as there’s no way to know for sure how rates will move in the future. In general, longer terms come with higher rates – you’re essentially paying for the stability.
However, the current state of the market also impacts the rates on different fixed terms.
- If interest rates are expected to go up then shorter fixed rates, such as a 1-year fixed loan, will be cheaper than a 3 or 5-year fixed rate loan.
- When rates are expected to go down, longer-term fixed rates will be lower than shorter-term rates.
Here’s a look at the pros and cons of different fixed loan terms:
- 1-year or 2-year fixed loan: It’s a short-term commitment. If you’re thinking of selling or refinancing in a few years but want stable payments in the short term, this can be a good option.
- 3-year fixed loan: Three years gives you stability if the market looks volatile over the short term and you don’t want to worry about rising rates.
- 5-year fixed loan: Five years is a long time. You may want to avoid this long of a term if you might refinance your loan in a few years. But, if you think interest rates may rise in the medium-term or would have trouble if your repayment amount did change, a 5-year fixed loan can be a practical option, especially if you can find a competitive 5-year fixed rate. Don’t forget, your mortgage broker can negotiate for a discount on your fixed rate.
- 10-year fixed rate: For more conservative borrowers, a 10-year fixed rate may be attractive. Those on a fixed income or anyone else who couldn’t afford rate increases over the years may also want to opt for a longer fixed term.
When Should You Fix Your Loan?
There’s no perfect time to fix your loan because no one can predict how and when interest rates will move.
- You don’t want to lock yourself into a fixed rate only to watch the Reserve Bank lower the cash rate, bringing down mortgage rates across the board.
- On the other hand, if rates increase, you’ll be happy you have a fixed rate and your mortgage repayments aren’t impacted.
The reality is, rates move up and down. The economy will be calm at times and at other times the economy and markets will be volatile.
If you fix your mortgage rate when rates are low and everything appears smooth, you won’t have to worry about any upcoming volatility. However, it’s hard to give up those low variable rates when high rates are a distant memory. Also, they may not go up during the entire time you fix your loan for, which means you’d end up paying more by opting for a fixed rate over a lower variable rate.
When rates are already high, a lot of borrowers feel like they should fix their loan because they are scared rates will keep going up. Try to take a broad look at interest rates – what are they likely to average over a period of time? If rates haven’t gone up (or down) in a long time, is it really likely they won’t change direction for three or more years?
Also, look at the whole picture of your financial situation when deciding if, when, and how long to fix your loan for. Factors like how flexible your budget is, how likely you are to change your loan, and how much flexibility you want with your mortgage should inform your decision – not just interest rates.
What Are the Risks of a Fixed Loan?
One risk of a fixed loan is that you would save money with a variable rate loan if interest rates remain low or decrease during your fixed term.
The other risk is the lack of flexibility. Fixed loans offer stability but they can also restrict what you can do with your mortgage. This inflexibility can cost you a lot of money. Here's how:
Fixed loans usually have high exit fees, known as break costs. If you need to break the loan before your fixed term ends – meaning you end the contract early – you may have to pay hefty fees. Break costs vary from lender to lender but you can easily end up paying thousands of dollars.
You may have to pay break costs if you:
- Refinance your home loan
- Sell your property
- Make a large lump sum repayment to pay off the loan early
Limited Features and Flexibility
Traditionally, fixed-rate loans don’t come with the same features you’ll often find with variable rate loans like unlimited early repayments, a redraw facility, and a 100% offset account. Some of these features can help you save money on interest and pay down your loan faster.
Make sure you shop around to get the fixed rate loan you want. Today, more lenders are offering fixed-rate loans with flexible features such as interest-only repayments, a redraw facility, 100% offset facilities, and no monthly account fees.
We are familiar with all the most competitive and feature-filled fixed rate loans on the market. Call today on (07) 3146 5732 to speak with one of our mortgage specialists.
How Does A Rate Lock Work?
If you are applying for a fixed rate loan, you can pay a fee to lock in the fixed rate that exists when you apply for the loan. This is something you can do if you’re worried that rates will go up before your loan is advanced. Without a rate lock, you’d end up paying the higher interest rate if rates did go up.
Rate locks are usually good for up to 90 days, although different lenders may have shorter terms. The fees will vary but expect to pay about 0.15% of the loan amount to lock in your fixed rate. Paying a few hundred dollars for a rate lock can save you a lot of money if rates do happen to increase whilst you’re waiting for your loan application to finalise.
What Happens When Your Fixed Term Is Over?
For most fixed rate home loans, once the term is over, you have the option of re-fixing your loan or of letting it go to the standard variable rate. If you do want to continue with a fixed term, it’s a good idea to contact your lender ahead of time. If you wait until the term is up, it may automatically switch to the variable rate.
Applying for a Fixed Loan
Depending on the market trends and which way rates may move, applying for a fixed rate loan or fixing your current loan may be something you want to do. Before making any decisions, it’s always a good idea to take the time to evaluate your unique financial situation and goals.
Just because rates are low right now doesn’t mean you should fix your loan. If, for example, you may decide to refinance in a few years to pay for a home renovation or to invest in property, you’ll have to either pay break costs or wait until the term is over and your loan reverts to the standard variable rate.
Also, don’t base your decision on news reports about mortgage rates. If you want to learn more about how rates behave, research the real estate market, look at historical trends, and seek out advice from an experienced financial advisor.
Once you are confident that the benefits of a fixed loan outweigh the risks according to your situation, you can focus on finding the best fixed loan for you. Depending on the length of your fixed term and the features you want, it can be challenging to find a competitive loan that you know you’re likely to qualify for.
Fill out our online contact form today for a free assessment or call us on (07) 3146 5732 and talk with one of our fixed loan mortgage specialists today. We can help you find a fixed loan you’re happy with!