With interest rates at an all-time low, many lenders offer fixed 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 provisions:
- borrowers may be restricted to maximum payments during the fixed term
- borrowers can face hefty break fees for paying off the loan early, selling the property, or switching to variable interest during the fixed-rate period
Fixed-Rate Term
There are some lenders that offer seven-year or 10-year fixed terms. But the three and five-year terms are generally the most popular for customers because a lot can change in that time.
Rate Lock
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.
Pre-approval
This helps you to discern how much money you are likely to have approved on an official application. 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.
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 minimize the risks associated with interest rate movements.
End of Term
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. Always contact your bank or broker at the end of the fixed term to review your home loan. If you would like us to review your home loan, feel free to book an obligation-free virtual appointment or leave us your details. Dream Catchers Lending is an MFAA-accredited member.
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