Fixing your home loan rate can be a smart option if you need to ensure that you stick to your household budget. But what happens when you choose a fixed rate home loan? What does it actually mean?
What is a Fixed Rate Home Loan?
As the name suggests, this is a home loan product that’s interest rate is set for a fixed amount of time, anywhere from 12 months, to 3 years to 10 years. During this fixed period, your mortgage repayments are locked in at a set price, which makes budgeting easier and provides peace of mind because you don’t have to worry about unexpected interest rate rises impacting your budget.
Lenders, typically banks, will offer fixed rate home loans with varying terms, with the most popular options being one to three years. A fixed rate home loan can attract a slightly higher interest rate compared to a variable rate loan, so if you fix your home loan for a longer period of time, you could end up paying more interest, particularly if interest rates remain the same or go down. However, if interest rates rise, then you will come out on top.
As the end of the fixed period term approaches, the borrower will have the option to choose another fixed term or switch to another type of home loan. It’s important that you make a decision about what type of loan you’ll switch to prior to the term finish date, otherwise the fixed rate will switch to what’s called a ‘revert rate’ which is often higher than the market rate, meaning you will start paying more.
You can avoid this happening by being prepared and reviewing your mortgage every 12 months. Chat to an ACF mortgage broker if you haven’t reviewed your mortgage recently.
Fixed Rate Mortgage Features
Until recently, the features available with a fixed rate home loan were few and far between. Now there are different options available, depending on the lender and type of mortgage. And while this is great, there are some restrictions associated with a fixed rate home loan that you should be aware of before you make the decision to go this route.
- Extra Repayments: depending on the type of mortgage product and lender, you might be able to make extra payments against your home loan, however these will normally be capped or limited to a certain amount each year. Make sure you read the fine print to ensure you understand these limitations.
- Loan-to-Value Ratio: because of the nature of a fixed mortgage, the LVR requirements are different, so if you’re a first home buyer, you might find that you need to come up with a 20% deposit as a minimum, rather than only 10% if it were variable.
- Offset Account: some lenders will allow you to have an offset facility, but this won’t be for the full 100% of the loan, it will be limited to a portion, such as 10-40%.
- Repayment Flexibility: this is one of the best features of a fixed rate mortgage, being able to choose the frequency of your repayments. You will have the option to choose weekly, fortnightly and monthly repayment options.