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Submitted by: Kimberley Ash
What advantages do I have by getting a fixed rate?
Fixed rate home loan allows you to lock in an interest rate, typically for a period of 1-5 years which reverts to a variable rate at the end of the period. This rate will not go up during the fixed rate period, so you know how much your repayments will be during this period. You do not need to worry if the rates rise above your fixed term. Be happy knowing you are paying less than the variable rate.
What do I lose by fixing my home loan?
If rates go down below your fixed rate you will be repaying more than the variable rate and you won’t benefit from the rate drop. In the Fixed repayments may also have a break fee if you change or pay off your loan within the set period e.g. if you sell your home, and also extra loan repayments are often not allowed if you have a fixed rate, or may only be allowed with a fee. Variable rate loans usually allow you to make extra repayments at no cost.
In a Variable home loan, the rate goes up and down which means your lender may put the rate up at any time, however you are usually able to make extra repayments in this type of payment.
What type of Interest rate should I chose?
Good options for those people who do not know how much can it affect your journey, is to make a bet both ways and only fix part of your home loan. Some people fix 50% of their loan and keep 50% as variable to manage some of the risk of interest rate rises while still being able to make extra repayments.
Rate Lock Fee
It is an option you can choose when applying for a fixed rate loan. The lender will charge a rate lock fee (up to 0.20% of the loan amount). The interest rate that you applied for is locked in so you are not affected if rates move before your loan is advanced.
Most people shop around for a great loan package with low interest rates, before they commit to a mortgage. Yet they dont know that they actually get the interest rate on offer when their loan is advanced, not the rate at the time that they apply.
For example, you see that ABC Bank has a fixed rate home loan at 5%. Before settlement, this rate could rise to 5.3% or fall to 4.7%. If you didnt choose to rate lock your loan then you will receive the interest rate on the day that your loan is advanced.
With rate lock, if the rate dropped to 4.7% then most lenders would allow you to have the lower rate, but if rates increased to 5.3% then you would be protected and would pay only 5%.
Be careful as some lenders do not allow you to benefit if the interest rate falls before settlement, they only protect you if the rate increases. So let our mortgage brokers help you to choose the lender carefully for you.
About the Author: Kimberley A is an expert property adviser and professional from North Sydney, Australia. The author loves to share her experience on the topics like types of home loans, best variable home loan rate, 5 year fixed rate home loans, big lenders, how to get loans approved, etc. so that latest property and home loan updates can be made available for the buyers before making any deal.For more visit here:
thefinancesite.com.au
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