A fixed rate home loan is the second most common type of home loan in Australia, second to variable home loans. Unlike a variable rate home loan which has fluctuating interest rates, a fixed rate provides you with a set interest rate for a fixed period of time, also known as a ‘fixed period’. These periods each have their own relevant fixed rate period, with generally the longer the fixed period, the higher the fixed interest rate available. There are some circumstances however where special fixed offers can provide fixed rates which may be out of step of this trend, ie you may see five year fixed rates at a lower rate than a 3 year fixed rate.
With any fixed rate, at the end of the fixed term it will revert to a variable home loan – however you can generally roll over the loan into a new fixed term with most lenders. It’s important to understand that unlike variable loans, a fixed loan generally have more limited features – ie few lenders allow an offset account with a fixed rate product.
Fixed rates are commonly used to provide certainty of costs – where you can receive a guaranteed repayment amount to factor into your budget. This is especially important in times where you need to manage your cash flow, ie if you’re in a short term period of lower income, having a new child and taking maternity leave etc.
Likewise it’s important to understand that with a fixed rate contract, whilst the lender will offer a fixed rate during the specified fixed period, if you wish to exit the loan or adjust it (ie refinance, change the loan type or any other change this could trigger a break fee – a fee which is calculated at the time of ‘breaking’ of the loan. To understand this cost, it can only be estimated on the day and changes daily – as it is a calculation which factors in the lenders wholesale lending costs and the remaining term of the fixed period.
Want to understand whether a fixed rate might be useful for your next loan? Speak with our mortgage brokers in Sydney to discuss your needs and find the best structure to meet your long term goals.