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, refinancing, or renegotiating with your current lender, you can generally decide between one of two loans; fixed interest loans, which maintain the same interest rate over a specific period of time, or variable rate loans, that charge interest according to market rate fluctuations.
Fixed rate loans have stability and predictability, and can be locked in at an agreed amount of time between you and your lender. We often recommend one to three years, as so many things can change over this time frame, but some lenders offer up to 10 years.
You can choose to lock in the interest rate when you apply for a fixed rate. At the point of loan application, you can choose to pay a fixed rate lock-in fee, which will generally give you between 60 and 90 days from the time of application to settle the loan at that fixed rate.
In addition, you can consider a ‘split’ loan. This option allows you to split your loan between fixed and variable rates at a ratio of your choice. This allows you to have a portion of your loan with fixed repayments while the remainder is on a variable rate, giving you more flexibility when interest rates change and potentially minimise the risks associated with interest rate movements.
Of course, a fixed rate loan can come with a few provisos; you could be restricted to maximum payments during the fixed term, and you could face hefty break fees for paying off the loan early, paying lump sums into the loan or switching to variable interest during the fixed rate period.
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. We will contact you in the lead up to your fixed rate expiring to go through all your options at that time.