If you like stability and are concerned about interest rate increases, a fixed rate home loan may be the answer.
Fixed rate home loans offer a fixed interest rate for a set period of time. Repayments then remain the same for the during the fixed rate period, usually between one and five years. At the end the fixed period, you can switch to a variable rate loan or take up another fixed rate period.
Benefits
- Stability – fixed repayments allow you to plan your finances and budget knowing that when interest rates rise, repayments won’t increase.
However, fixed loans generally have limited features and often charge hefty fees for early payout or for making additional payments.
Time to fix
Knowing when to fix and when to stay with the variable rate is difficult. Even the best economists can’t predict with absolute certainty when interest rates will rise or fall. Many borrowers choose to take periods of less than three years. That way if rates do fall, you are only paying a higher rate of interest for a relatively short period.
When thinking about a fixed rate, spend some time researching recent rate movements, speak to your lender about where rates are headed and be aware of general economic news. As a rule of thumb, it is best to fix at the bottom, or near the bottom of an interest rate cycle before rates start rising again.
At a glance
- monthly repayments remain the same
- interest rate fixed
- some lenders charge hefty exit fees
- less flexible features
- limited repayment and redraw options
