Fixed Home Loans
What are Fixed Rate Home Loans
A home loan is where the bank or finance company lends you an agreed amount of money so that you can purchase a home. In return you sign a contract agreeing to pay the money back over a number of years (usually 25 or 30), along with interest calculated at a specific rate. The actual rate of interest on a fixed home loan will differ depending on the number of years that the loan is fixed for and it cannot change for this length of time.
Fixed Rate Home Loans are fairly standard nowadays and just about all of the banks, credit unions and building societies in Australia will be able to offer you one. The length of time for which you can fix your home loan are similar across all lenders, being 1, 2, 3, 4 or 5 years. Occasionally you are able to fix your home loan for 10 years with certain lenders.
Who are Fixed Home Loans Suitable For
Home Loans in general are suitable for anyone who wants to buy a house, provided that they fit the criteria that most lenders are looking for. This criteria includes having a good credit history, a steady job with regular income and either equity in an existing property or a deposit saved up in their bank account.
Fixed home loans are the choice of people who want to be able to budget with safety and always know what their interest repayments are going to be in the near future. By taking out a fixed rate home loan people are normally prepared to pay a slightly higher interest rate than a variable home loan for the added security of knowing that their repayments cannot increase in the term of the loan.
Advantages of a Fixed Home Loan
- If the lender's interest rate goes up then your interest repayments still remain the same.
- Fixed home loans provide reasurrance and security to borrowers, knowing that they don't have to worry about future interest rate rises.
- Budgeting your household finances is much easier if you know exactly how much your mortgage repayments are going to be.
- You have the choice of how many years you want to fix or lock your home lona in for.
- Fixed loans are often easier to qualify for because there is less requirement to factor in future interest rate rises.
Disadvantages of Fixed Rate Loans
- If the market interest rate starts going down then you are left paying a higher interest rate.
- There are often only limited ability to make additional payments on fixed loans.
- You will be penalised with often heavy break costs if you want to refinance the loan early.
- There are limited or no redraw facilities with fixed rate home loans.
- If you get a financial windfall and you want to pay off the loan completely then you will have to pay a big fee or keep the loan until the fixed period ends.
Common Fixed Home Loan Fees
- Exit Fees - Commonly referred to as Break Costs these fees occur when you want to change the loan before the end of the fixed term and can be very high (sometimes $10,000s).
- Rate Lock Fee - This fee is an insurance policy to protect you from the fixed rate going up between the time that you applied for the fixed loan and the time that the actual loan settles.
- Loan Application Fee - Charged when you apply for the fixed rate home loan, but can sometimes be waived by the lender.
- Lenders Mortgage Insurance - If you Loan to Value Ratio is greater then 80% then you will have to pay LMI to protect the lender from you defaulting on the loan.
- Monthly Fee - Some lenders charge a monthly fee for their fixed rate loans.
- Late Payment Fee - If you fail to make your repayment on time then you lender may charge you a penalty.
Important Aspects About Fixed Loans
It is a good idea to save up as large a deposit as you can before purchasing your house. This way you will save lots of money on interest repayments over the course of the fixed loan. Also provided that you have more than a 20% deposit you will not be required to waste thousands of dollars on Loan Mortgage Insurance, which only protects the lender from you defaulting on the loan.
Fixed home loans are great at providing you with security and peace of mind when it comes to interest repayments, however be aware of what happens to the loan at the end of the fixed term period. The loan will generally revert to one of the lender's variable loan products and this may not necessarily be the most appropriate product for your needs. If this happens then you will have to refinance the loan into a more suitable product, possibly paying another application fee in the process.
After doing all your research and finally choosing the best fixed interest rate home loan it would be a shame if the lender suddenly changed that rate before you have a chance to lock it in. You should be aware that whenever you apply for a fixed rate home loan the actual rate that you end up with is the rate on the day that your application is finally approved, not the day that you applied. You can avoid this scenario by paying a Rate Lock Fee, which is highly recommended because it is a small price to pay for real piece of mind.
One of the main problems that people have with fixed home loans is that when interest rates go down they would like to end the fixed loan and take advantage of the lower interest rates on offer. When you break your fixed loan, however, most lenders will charge a fee that is equivalent to the difference in interest repayments between the fixed and lower variable rates. For this reason you are normally better off to just continue with you fixed rate loan and keep in mind that you took out the loan in order to have piece of mind about your interest repayments.
If there is some loan terminology or abbreviations that you are unsure about the meaning off then you can check out the home loan definitions page, which has a detailed explaination about some of the more confusing aspects of getting a home loan.