What fixed interest home loan & why go for it?
A fixed interest home loan or a fixed rate home loan is a type of mortgage where the interest rate is set for a certain amount of time. Mostly fixed rate terms are between 1 – 5 years, while some lenders offer rate locks that can go up to 10 years or more.
The advantage of using a fixed rate is that exactly how much your repayments will be throughout the duration of the fixed term, which means you can enjoy greater financial stability and security, and reap the benefits of simpler budgeting.
If you’re a first-home buyer, looking to refinance or a long-time property investor, looking into fixed home loan rates might be the most suitable for your financial situation. Even if a lender raises its variable interest rates, your fixed repayments of your home loan will remain the same. As most fixed rate loans have fewer features, it could cost you less in the long run. Most fixed interest rates in this type of loan can only be fixed for a set period of time, which leads to predictable loan repayments that you can track, and pay accordingly- afterwards, once the fixed term has ended, the loan reverts back to the lender’s standard variable rate.
Fixing the rate on your home loan
With most lenders, you can simply give them a call and they can fix the interest rate over the phone. Usually, you can fix your interest rate between 1 – 5 years.
It’s important to note that fixed interest rates work very differently to variable rates. Unlike variable rate home loans, you tend to lose repayment flexibility, and often have to pay significant exit fees (break fees) if you wish to refinance your loan, switch to another loan, make extra repayments or want to sell off your property.
As leading mortgage brokers, we advise you to avoid fixing your interest rate if:
- Require making large extra repayments on your loan.
- Plan to sell your property within the fixed term.
- Plan to refinance your home loan within the fixed term.
- Plan to renovate or build a new home, and use equity within the fixed period.
- Prefer not to be locked in with a particular lender or loan product
How your loan term affects your interest rate
When it comes to a fixed Interest home loan, the length of your fixed rate period on your loan is essential.
The length of time of your repayments will remain the same as interest rates rise and drop, so it’s important to do your research and think about the overall length of your home loan’s term, as it can affect how much interest you will pay in total throughout the lifetime of your loan. Your mortgage broker can help you calculate your overall repayments to provide you a clearer picture of your interest rate. Consider the following when comparing fixed interest rates:
- Choosing a shorter loan? You’ll make a smaller number of repayments, each one for a larger percentage of the loan’s principal.
- Short term loans may cost your more, month to month yet fewer repayments means fewer interest charges
- You’ll likely to pay less interest in total over the lifetime of a short-term loan
- If you stretch out your home loan over a longer term, it means more repayments but each one a smaller percentage of your loan’s principal. As a result, the total loan amount increases over time.
- You’ll also be most likely to end up paying more in total interest compared to opting for a shorter loan term.
Ending fixed interest home loans & break costs
Once you lock in your interest rate with a fixed rate home loan, we also lock our funding costs at a fixed rate to manage interest rate changes.
Before you take out a fixed rate home loan, it’s worth thinking about possible scenarios should you decide to break the fixed interest rate period early. Why? You will have to pay a fee to your lender, which can be large- possibly thousands of dollars. You will also be asked to pay a set administration fee.
A fixed rate break cost and administration fee can apply during your fixed rate period if you:
- If you make a large loan payment
- Switch back to a variable rate
- Decide to close your loan account
- Decide to pay off some of your loan early
- Switch of split your loan
- Increase (top-up) your loan
Why Choose Rateseeker?
Our experienced mortgage brokers have established long-standing relationships with leading banks. As a result, we may be able to negotiate with them and find the best interest rates for your fixed interest home loan on your behalf. Depending on your financial situation and lifestyle goals, our experienced team can talk to the lender in organising a lower fixed rate for you. For more information about our team of mortgage brokers and their services, head on over to our FAQs.
At Rateseeker, our team is on a mission to empower all Aussies to find the right home loan by educating them along the way. We make sure you know exactly what you need to do to get that dream home you’ve always wanted, and help you compare the best loan products with accessible industry-leading comparative tools. Our online approach provides you with an estimate on how much you need to borrow to buy the property you always wanted. In the end, Rateseeker is here to give you a clearer picture of your current financial state, and as much help as possible to get closer to that dream home.