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Many borrowers opt for a fixed rate home loan to help maintain repayment stability, particularly if they believe that interest rates will rise.

However, It is important to also look beyond the rate for the fixed period in order to find the best fixed rate home loan. Fixed rates only lock in the rate for a period of time, after which you either re-fix or allow your loan to revert to the variable rate. This means that you are not protected from rate increases forever.

So, what should you consider when choosing a fixed rate home loan?

Fixed rate pros

  • Certainty: If you like to budget and know exactly how much goes towards your home loan each month, then you may prefer the stability of a fixed rate home loan.

  • Protected from rate increases: If rate rises occur during the fixed rate period, you will be be protected from them. This could save you a significant amount in interest during this time.

Fixed rate cons

  • No redraw: Fixed rate home loans generally don’t allow you to redraw extra repayments from your home loan. If you currently have redraw available you may need to think about whether you will need to access these funds prior to locking the rate.

  • No offset account: Similar to extra repayments, a lot of fixed loans don’t allow you to have an offset account to help reduce interest payable. If you use an offset account extensively, then you need to ask the lender or consider a split loan detailed in the next section.

  • Break costs: If you want to refinance or sell the property and repay your home loan in full before the end of the fixed period, you may be charged a fixed rate break cost. The amount of the break cost will depend on whether variable rates have fallen or risen during the time you have fixed your loan. If they have fallen these break costs can amount to thousands of dollars if you have to sell the property or want to refinance. Get a clear idea of when these break costs will be incurred so you know your restrictions.

  • Setup and refinance fees: If you decide on a fixed rate with a different lender, you will incur discharge costs on your existing loan and setup costs on the new loan. If the variable rate that the loan reverts to is not competitive, you may also incur these same costs if you decide to refinance to a cheaper variable rate at the end of the fixed term. Ensure that you understand the costs involved and factor these into your calculations when determining whether it is a worthwhile exercise.

What to be cautious about?

Similar to honeymoon rates, lenders can offer competitive fixed rates for the first 1-5 years of a home loan, but then once this fixed period is over, the variable rate it reverts to may not be as competitive. If this happens you may be faced with having the cost and hassle of refinancing to find a better variable rate. When considering your options be sure to find out.

Consider a split home loan

Some loans allow borrowers to divide their home loan up into fixed and variable portions. The benefits of a split loan include:

  • Help spread the ‘risk’ so that not all your loan is locked into a single fixed rate. If rates fall then you will benefit from the decrease on the variable portion while still having some repayment stability on the fixed portion.

  • Enables you to take advantage of the features offered on variable loans like being able to pay extra and having an offset account.

When doing your research, ask lenders about the options you have for fixing some or all of your loan.

Look for flexibility

If you like the idea of having the same interest rate and repayment amount for 1-5 years of your loan, but also want some flexibility, chat with the lender about your options. A lot of fixed rate home loans don’t allow the following but there are some exceptions so be sure to ask about:

  • Extra repayments

  • Portability (being able to sell and buy a property while keeping the same loan)

  • Redraw facility

  • Offset account

You may be used to utilizing all of these to save on your home loan and need to work out the impact of not having access to these if you fix with a loan that doesn’t allow them.

How long to fix for

There are different fixed rates for different amounts of time. Typically you can choose to fix your loan for 1 – 5 years but can be even more. Due to the restrictions of fixed rate home loans, think carefully about your plans in the future and how long you should fix for.

Key Questions to ask yourself

  • How many years can you envisage that you will keep the property?

  • If your family is growing? Will you need to sell and upsize to give you more space?

  • What about your employment? Is there a chance you could need to relocate to a different city and want to sell the property so you can purchase again?

  • If variable interest rates were to fall and you were locked into a much higher rate, how would this make you feel?

Make sure you choose a fixed rate time period that you can live with. Markets and circumstances can change so choosing a time periods that is realistic given the restrictions is important.

Shop around

The best way to get an idea about what is on offer is to compare fixed and variable rates from different lenders. Take a look at a few different financial comparison websites to see what lenders are offering. Then, create a list of loans and lenders you are interested in and start making enquiries. Your first call may be to your existing lender to see what they are offering.

Quick Tip

Key Facts Sheets are a great way to compare home loans side by side. These are offered by most lenders so be sure to ask. The Key Facts Sheet will give you a personalised comparison rate based on your loan amount and loan product you choose and includes the ongoing fees as well as the variable rate that it will revert to. You can then use the personalised comparison rate to compare different offers.

For a Key Facts Sheet for a State Custodians loan Click Here

If you’re not sure about whether to fix your home loan or not, we can help. At State Custodians, our Lending Specialists can give you the information you need to make a decision, whether it be for a fixed, variable or split home loan.

You can call them on 13 72 62 or leave your details here and they will contact you.