A fixed rate loan is a loan that has an interest rate set for a specific period of time. The fixed rate period is typically 1, 3 or 5 years. Once the fixed rate period has expired, your loan will switch to the standard variable rate offered by your home loan provider, unless you enter into another fixed rate contract.
Before making the decision to fix your home loan interest rate, consider these “tricks and traps” of fixed rate home loans.
Tricks
A major benefit of fixing your home loan interest rate is that is provides a sense of certainty for the fixed interest rate period. Because your interest rate is locked in, you will not be affected by any interest rate rises and your re-payments will stay the same over that period of time. This makes it easier to budget as you will know exactly what your repayment commitment will be from month to month. The trick is take advantage of this period to plan ahead and achieve your financial goals.
Traps
If interest rates drop, you will not benefit from this. Your interest rate and repayments will stay the same. It is possible that your fixed interest rate will be higher than the current variable rate.
Often fixed rate home loans are restricted in the services they offer and are not as flexible as standard variable home loans. For example, you may not be able to make extra repayments to your home loan, or may have to pay a fee to do so. If considering a fixed rate home loan be sure to look closely at the fees, charges, repayment options and the terms and conditions. Don’t become trapped in an inflexible home loan that does not suit your needs.
Still can’t decide? Consider splitting your loan – part fixed and part variable.
Most home loan lenders will allow you to split your home loan by having a part fixed and part variable interest loan. A split loan allows you to manage some of the risks of interest rate rises while still being able to make extra repayments.
It’s impossible to accurately predict how interest rates will move, so it’s important to choose a home loan with the features that work for you. At Hunter Lending Solutions we work with you to secure the best possible mortgage deal for you. Talk to us today.