A fixed-rate home loan is one of the two most common types of home loan. With this option, you can set your interest rate, locking it in for a certain period. Most fixed-rate home loans are for a period of three, five or ten years.
Pros and cons
With a fixed-rate loan, you know the exact amount of all your future repayments, allowing you to budget accordingly. In addition, a rise in interest rates doesn’t affect your loan. Your interest amount will stay the same. However, if interest rates decrease, you are stuck. You might end up paying more than a friend with a variable rate loan. Another con of fixed-rate loans is that you cannot pay extra or redraw these types of loans, decreasing the flexibility of using them.
Things to consider
If you are interested in applying for a fixed rate home loan, you should keep a few things in mind.
1. Could interest rates change? If they are low now, how long will they stay that way? If they are high, will they be lowered while you’re still stuck with the higher rate?
2. Can you commit to the entire loan period? If you want to refinance or sell your property and pay off the loan before the end of the fixed loan period, you could end up paying a hefty break fee.
3. When you reach the end of the fixed period, your lender might not switch your interest rate to the lowest rate. Instead, they may switch you to their standard rate. This standard rate could be higher than their lower interest rates. If you want to refinance, you may have to pay some unexpected fees.
Before applying for a fixed rate home loan, you should consult with an experienced mortgage broker. Mortgage Street and its team of brokers can help you evaluate your financial situation and provide you with quotes for fixed-rate loans.