Explainer – Fixed rate loans; the ins and outs

Knowing what your repayments will be each month can help you with budgeting and 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 can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period.

However, 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 movement.

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 five years are the most common.

One important thing to be aware of is 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.

Pre-approval

Fixed-rate loans can also be pre-approved. This means that you can apply for the fixed-rate loan before you find the property you want to buy.

Pre-approval helps you to discern how much money you are likely to have approved on official application. Knowing that your potential lender will offer a fixed-term fixed interest loan can give further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.

Rate locks

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 for borrowers.

Split loans

In addition, borrowers should also 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 five 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. 

MFAA Accredited Finance Brokers are loan specialists. Speak to a broker about how to finance your property purchase and what type of loan is right for you.