The interest rate you pay on your home loan deserves close attention. It’s the biggest cost of your loan, and opting to fix your loan’s interest rate can provide a number of benefits. It shelters you from interest rate rises (at least during the fixed term), and when rates are low it lets you enjoy lower repayments for longer.
A fixed interest rate loan also brings certainty to your loan repayments. As the interest rate won’t change during the fixed term, your regular repayments remain the same no matter how interest rates move. This can make fixing a good option for managing your loan repayments.
While it’s possible to fix your loan’s interest rate for a variety of terms, usually from one to five years, locking in your loan’s interest rate calls for careful thought. Along with plenty of upsides, fixed interest rate loans can have drawbacks.
We explain what to weigh up if you’re thinking about fixing your home loan interest rate.
1. The flexibility to pay more.
With most variable interest rate home loans, you’re able to make extra loan payments to help clear the balance sooner and save on interest costs. This may not be the case with a fixed interest rate loan. You may be limited to the monthly repayments set out by the lender. And without the ability to make additional payments, you won’t have the benefit of loan redraw.
In the same vein, most fixed interest rate home loans don’t come with the option of an offset account or redraw.
NOTE: The good news is that with a Defence Bank fixed interest rate home loan, you can make additional repayments without penalty.
Remember, a fixed interest rate term lasts a set period. So, when the fixed term is over, you can opt to revert to a variable interest rate and have the freedom to pay more off your loan or harness the power of an offset account.
2. The prospect of ‘break costs’ for early payout.
If you want to bail out of a fixed interest rate loan early – something that can happen if you choose to refinance your loan, the lender may ask you to pay a break cost. How much you pay depends on your bank, how far you are into the fixed term and how market interest rates have moved since you fixed your interest rate.
It’s a complex calculation, and your lender can explain how it works for your loan. But worst case scenario, break costs can run into several thousand dollars. By contrast, lenders cannot (by law) charge exit fees if you choose to pay off a variable interest rate loan early.
3. You could pay a higher rate.
Once you sign up to a fixed interest rate loan, the interest rate you pay won’t change. This can work in your favour if interest rates rise as you’ll still pay a lower rate. But if interest rates fall, you could find yourself paying a higher interest rate than necessary.
Interest rate movements can be hard to predict. In this sense, fixing the interest rate on a home loan does involve taking a chance on how interest rates will move in the future. The longer the fixed term you select, the harder it is to foresee if interest rates will go up or down.
Splitting – the best of both worlds.
There is a way to enjoy the certainty of a fixed interest rate plus the flexibility of a variable interest rate. That’s by splitting your home loan between fixed and variable components.
Most lenders will let you choose the split you want, maybe 50:50, or perhaps 40% fixed and 60% variable.
Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.