With interest rates at an all-time low, maybe you’re thinking about locking in the rate on your home loan. But a fixed rate home loan isn’t for everyone and it pays to know the ins and outs before you take the plunge.
When it comes to rates, you generally have three options:
- Fix: Lock in your interest rate for a fixed period of time
- Variable: Ride market fluctuations with a variable rate
- Split: Use a combination of the two.
Fixed rate home loans are attractive because they give you certainty over your repayment amounts for a period of time. But they usually come with a few provisos.
One is that you may be restricted in how much extra you can pay off the loan (if any at all). Another is that you generally can’t redraw any money from the loan. And, finally, you can face hefty break fees if you pay off the loan early, sell the property or switch to a variable rate during the fixed rate period.
“If you’re conscious of your budget and want to take a medium-to-long term position on your loan, a fixed rate home loan can be a good way to protect yourself from the volatility of rate movements,” Catherine Denney, Nook’s chief mortgage broker, explains.
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 popular,” said Catherine.
What happens when the fixed rate period ends?
When you sign up for a fixed rate home loan, your loan contract will also specify the ‘revert rate – the variable rate that your loan will flip to once the fixed rate period is over.
It’s a good idea to set a diary reminder for a couple of months before your fixed rate expiry so that you can check back in and see if the revert rate is attractive.
If not, this can be a good time to speak with your mortgage broker about conducting a mortgage review and potential refinancing.
What’s a split rate loan?
A split rate loan 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 variable. This approach gives you more flexibility whilst potentially minimising the risks associated with interest rate movements.
SHOULD I PAY FOR A RATE LOCK?
Another thing to consider is whether you want to lock in the rate whilst you shop for your property.
“When you apply for a fixed rate, you can pay a ‘rate lock’ fee. Depending on the lender, this gives you between 60 and 90 days from the time of application to settle the loan at that rate. This protects you if the rate goes up before you settle on your property,” Catherine explained.
Every lender charges a different amount. Sometimes it’s a fixed fee, whilst other times it’s a percentage of the total loan amount.