Considering a fixed rate home loan? Discover the benefits and drawbacks of locking in your interest rate.
When choosing a home loan, borrowers often find themselves stuck between a fixed rate or a variable rate product. While both have their advantages, this guide will help you explore the benefits and drawbacks of fixed rate home loans.
What is a fixed rate home loan?
A fixed rate home loan locks in your interest rate – and therefore your home loan repayments – for a certain period of time.
Home loan interest rates are commonly able to be fixed for between one and five years, with some lenders offering fixed rate periods of up to seven or even ten years.
After a borrower’s fixed rate period ends, their lender will generally reach out to negotiate another fixed rate period or a variable rate to ‘roll on’ to. If that doesn’t happen, their rate will likely revert to a standard variable rate.
Benefits of a fixed rate home loan
Fixed home loan rates aren’t for everybody, but they do boast numerous benefits. For instance:
Fixed rate home loans can provide certainty
Having a fixed monthly mortgage repayment can be beneficial, especially if you like financial certainty.
It can help you organise your budget and make detailed plans for years in advance, potentially allowing you to stay on top of your repayments over the long term.
Fixed rates protect you from sudden rate increases
A fixed rate borrower will find themselves protected if the Reserve Bank of Australia (RBA) raises the cash rate, thereby prompting lenders to raise their interest rates.
They’ll also be spared from financial pain in the instance their lender chooses to implement an out-of-cycle rate hike.
In such scenarios, having a fixed rate home loan will likely see you breathing a sigh of relief.
Disadvantages of a fixed rate home loan
It’s important to understand the potential downsides of fixing a home loan’s interest rate before diving in.
You could miss out on rate cuts
As fixed home loan rates aren’t impacted by market movements, your interest rate might end up higher than the industry average if interest rates were to fall.
Usually, when lenders are expecting cash rate cuts, fixed rate offerings are cheaper than their variable rate counterparts. On the other hand, fixed rate loans are typically more expensive when banks are anticipating rate hikes.
Fixed rate home loans typically offer fewer features
Fixed rate home loans also tend to provide less flexibility than variable rate home loans. They often don’t allow for the use of certain features, such as offset accounts, and they commonly limit how many extra repayments a borrower can make each year.
You could face break fees if you refinance your mortgage or sell your home
Lastly, borrowers with a fixed home loan rate might face break fees if they refinance their mortgage or sell their property. The size of these fees can vary from nothing to tens of thousands of dollars, depending on the interest rate environment.
That’s because lenders finance fixed rate home loans differently from variable rate home loans. They typically source the funds for fixed rate mortgages from longer term investments, such as bonds or the wholesale money market. In contrast, variable rate home loans are usually funded through deposits from savers and other shorter-term funding facilities.
If you take out a fixed rate home loan, your lender will likely pay interest on the funds it provides you at a lower rate than what you’re being charged – the difference is its profit margin.
That means that, if you break your fixed rate agreement, your lender may end up in the red, and it will charge a break fee in order to cover any financial loss it incurs.
Compare some of the best fixed rate home loans available now
Check out some of the best fixed rate home loans available in the market today in the table below.
Important Information and Comparison Rate Warning
Article originally written by Gerv Tacadena.
Image by Debby Hudson on Unsplash
