What is a fixed rate home loan?

What is a fixed rate home loan?
If you're trying to decide whether a fixed rate mortgage is your borrowing match, read the advantages and disadvantages of a fixed interest rate here.
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A fixed-rate home loan simply means that the interest rate remains the same throughout the fixed rate term of the loan.

This is an alternative to a variable rate home loan which is when the lender can change the interest rate over the life of the loan.

When you begin comparing options for your home loan, you’ll find some come with different features. There are various repayment types and other options such as offset sub-account.

The interest rate is important because it plays a huge role in determining the size of your regular repayments and the total mortgage amount you will repay over the life of the loan.

At loans.com.au, we let our borrowers choose what type of loan they want, whether it be fixed, variable or split, and what features they’d like to add.

Understanding fixed rate mortgages

As the name suggests, a fixed rate mortgage means that your interest rate will remain unchanged throughout the fixed rate term. One of the benefits of a fixed rate home loan is you’ll pay the same amount every repayment whether it’s weekly, fortnightly, or monthly.

Bear in mind that the fixed rate period will expire after an agreed period of between one and five years. Once the fixed-rate term ends, your mortgage will go back to a variable rate so the rate can fluctuate over the life of your loan.

During this time you are in a contract with your lender for this fixed rate, breaking this contract will incur break costs.

Break costs are incurred when the loan is paid off early or payments cannot be made.

It’s possible to restructure repayments however break costs are a factor you may need to consider when entering into a fixed rate home loan.

It is also possible to have a split home loan, which is a combination of fixed and variable.

At different portions, you split your home loan balance into two accounts, one being charged a fixed and one a variable rate.

For example, a 70:30 split, would see 70% of your loan charged at the lenders standard variable rate, with the other 30% being charged at a fixed rate for a span of 1-5 years.

Advantages and disadvantages of fixed interest rates

Advantages of fixed interest rates:

The main reason people opt for a fixed rate mortgage is certainty of repayments. As mentioned, fixing your home loan interest rate means you know exactly how much you will need to pay every month.

This makes budgeting a lot easier, letting you plan your finances ahead of time and helping you maintain your standard of living. It is particularly valuable if you don't have enough room in your budget to handle a spike in the interest rate.

Disadvantages of fixed interest rates:

While it’s an advantage to be protected from a mortgage rate increase, this can also be a disadvantage. If the interest rate goes down you will miss out on any savings. Even small changes in interest rate can greatly impact your repayment amount.

Another disadvantage of a fixed mortgage is the restricted features. There will be fees charged if you move to refinance your loan to a lower rate, make additional repayments, or add an offset sub-account. The fees can also be very expensive if you move to end your fixed rate term early.

Deciding whether you should fix your mortgage is ultimately a personal decision which will depend upon your financial situation and goal.

If you're ready to lock in a low fixed rate home loan, chat to one of our friendly lending specialists today.

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