February 06, 2017
When taking out a mortgage, one of the many things you will have to consider is whether you want a fixed rate home loan.
A fixed rate home loan allows you to fix your mortgage interest rate for a certain period of time – be it one, three, five seven, 10 or even 15 years.
Aside from providing you with a degree of certainty around your mortgage repayments, there are many other benefits associated with fixed interest rates.
Benefits of fixed interest rates
Fixed rate home loans can help you to take advantage of low interest rates for an extended period of time. If you lock into a fixed rate mortgage for a certain number of years, then regardless of what happens with interest rates, your mortgage repayments will remain the same over the course of your selected time frame. In other words, fixed rate home loans allow you to safeguard yourself against future rate rises. And, as you know what your mortgage repayments will be, you can manage your finances and expenses more easily.
But while fixed interest rates can offer you stability and certainty around your mortgage repayments, as well as the opportunity to take advantage of low rates, one of the disadvantages associated with fixed rate home loans is you won’t benefit from falling interest rates.
Disadvantages of fixed interest rates
If you are locked into a fixed rate home loan and interest rates start to fall, you will not benefit from the rate cuts. Being in a fixed rate home loan means your interest rate does not change for a certain period of time. So, regardless of whether interest rates rise or fall during your fixed rate home loan term, you will continue to make the same mortgage repayments.
Fixed rates are generally quite inflexible as far as home loans go. Many lenders do not allow customers who are locked into a fixed interest rate home loan the ability to make additional mortgage repayments when they have a surplus of cash.
Further, if you want to get out of your fixed rate home loan, many lenders will charge a considerable break fee for the privilege – especially if rates have fallen since you took on the fixed rate.
Generally speaking, the more rates have fallen since you took out your fixed rate mortgage, the higher the break fee will be. Worse still, you won’t know how much your break fee will be until your credit provider lets you know.
So why are you charged a break fee for exiting a fixed rate early? The simple answer is that fixed rate home loans are legal contracts that guarantee you will repay a fixed amount of interest on a loan for a specified time period. And, if you decide to break that contract by refinancing out of the fixed rate, your existing lender needs to be compensated for any loss they incur.
With this in mind, it is worth giving some serious thought to how much loan flexibility you think you will need before jumping into fixed rate home loans.
Partial fixed interest rates
If you know you would like some level of home loan flexibility so that you can make additional repayments if and where possible, then a partial fixed rate home loan may be just the ticket.
Partial fixed rates offer you the flexibility of variable rate home loans combined with the stability and certainty of fixed interest rates.
Partial fixed rate home loans, otherwise known as split rates, lets you pay a fixed rate on a portion of your loan and a variable rate on the rest.
For example, say you have a $300,000 home loan – you can choose to fix $200,000 of the mortgage and have a variable rate on the other $100,000.
It is worth noting that there are no rules or regulations on how you can break up your mortgage. You can have complete control over the way you split your loan and can choose to fix any percentage of your mortgage.
Partial fixed rates or split rate home loans are great if you want the security of regular repayments on part of your loan, but also want to take advantage of the flexible features that come with variable rate home loans.
Call Suzanne, Owun or Costa in the office on 02 9517 1818, or email firstname.lastname@example.org to discuss your options. Or, if you feel like dropping in at our office, we are located at Suite 106, Flourmill Studios, 3 Gladstone Street, Newtown 2042. Be sure to share our blog on Facebook and Twitter and let others join the conversation!