With interest rates at an all-time low, and many lender’s fixing 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 fixed interest loans that 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 usually come with a few provisos:
Borrowers may be restricted to maximum payments during the fixed term and
They may also face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period.
On the plus side, locking in the interest rate on your home loan can offer stability.
“For those conscious of a budget and who want to take a medium-to-long term position on a fixed rate, they can protect themselves from the volatility of potential rate movements,”
Fixed rates are locked in for an amount of time that is prearranged between you and your lender.
There are some lenders that offer seven-year or 10-year fixed terms, but generally one to four years are the most popular.
When you apply for a fixed rate, you can 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. It will also depend on the lender as to whether the rate lock will be applied on application or approval. It is important to be clear on this issue as it has been known to be a common point of error with the fixed rate applied at time of approval and sometimes even settlement of the loan.
Knowing that your potential lender will offer a fixed-term fixed interest loan gives further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.
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. A great opportunity to 'hedge your bets'.
Finally, 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.
Speak to a BluePebble Broker to find out how to best structure your loans according to your current situation as well as short and long-term objectives. Structuring your loans optimally is likely to save you thousands over the life of the loan and potentially even in one year!
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