Key Takeaway Table
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Definition
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A fixed-rate home loan is a type of mortgage where the interest rate remains fixed for a set period, typically around 1-5 years. During this time, the homebuyer’s regular repayments will stay the same amount regardless of any changes in the market. After this initial period, the loan will automatically roll over to the standard variable rate unless the borrower asks to refix or refinance the loan.
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Benefits of a Fixed Rate Home Loan
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The main benefit of a fixed-rate loan is the predictability and stability it offers. For a set period, buyers know exactly what they will pay, making financial planning easier. Borrowers are protected from any increases in the market rate, which can be beneficial during economic downturns. Finally, homebuyers have different options when the fixed period is over.
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Is a Fixed Rate Loan Right for You?
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Fixed-rate loans are best for certain circumstances and buyer profiles. It may be right for you if you're risk-averse and can pay slightly higher interest rates. It can also be good for you if you're a first-time homeowner who plans to live in your home long-term. Finally, a fixed-rate loan is most beneficial when the market rates are continuously rising or predicted to rise.
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For those who want to buy a home in Australia, there are several home loan types to choose from. One such loan type is the fixed-rate home loan. Is this the right type of mortgage for you? Let’s take a look at the advantages of a fixed-interest rate loan and find out if it suits your borrowing needs.
What is a Fixed Rate Home Loan?
A fixed-rate home loan is a type of mortgage where the interest rate remains constant or fixed for a certain duration of the loan term. In Australia, fixed-rate terms usually last 1-5 years before rolling over to the regular variable rate. This means that for the fixed period, your monthly principal and interest payments remain the same despite any economic changes.
Benefits of a Fixed Rate Home Loan
Protection from Rate Increases
If market interest rates rise, you won't be affected during your fixed-rate period. This can potentially save you a significant amount of money in interest payments if the standard variable rates go up.
Predictability in Repayments
The primary advantage of a fixed-rate home loan is the predictability it offers. Your interest rate is locked in for a specific period, typically ranging from one to five years, meaning your repayment amounts won't change during this time. This predictability makes budgeting easier, as you'll know exactly how much you need to allocate for your loan repayments each month.
Simplified Financial Planning
Knowing your repayment amount for the foreseeable future can make it easier to plan other aspects of your finances, from daily living expenses to long-term savings goals.
Options After the Initial Fixed-Rate Period
Once your primary fixed-rate period is nearing its end, your lender will typically give you a few options.
Options After the Initial Fixed-Rate Period
- Roll over to variable rate: This option naturally happens if you don’t do anything after the fixed period is over. It’s best for when the market rates are low or predicted to decrease but there are normally better options than the standard variable revert rate.
- Refix the loan: This would mean selecting another fixed rate and term with your lender.
- Refinance the loan: A refinance is the process of taking out another loan to pay out your existing loan. You should only do this if the new loan is an improvement on your existing loan.
It’s important to note that while fixed-rate mortgages offer stability, on average, they usually have higher interest rates compared to variable-rate mortgages. Additionally, if market interest rates decrease, you won’t benefit from the lower rates. Borrowers should carefully consider their circumstances and the current market conditions when deciding on the type of home loan that best suits their needs or talk to an expert to gain guidance.
Is a Fixed Rate Loan Right for You?
Fixed-rate home loans are well-suited for certain types of buyers and specific financial situations. A fixed-rate loan may be the right choice for you if…
You’re a first-time homebuyer
As a first-time homebuyer, you may appreciate the simplicity of fixed-rate mortgages. The straightforward structure can help you understand and manage financial commitments without worrying about fluctuations in interest rates.
You’re seeking stability
Fixed-rate mortgages are ideal for buyers who prioritise financial stability and predictability. If you prefer consistent monthly payments that won’t change for the first few years of the loan, a fixed-rate mortgage is a good fit.
You can pay slightly higher repayments
Fixed interest rates are usually slightly higher than variable rates to accommodate any potential increases in the market cash rates. If you think rates are going to rise, selecting a slightly higher fixed rate could be an insurance policy against future interest rate rises and can save you money in the long run.
You want to be a long-term homeowner
A fixed-rate home loan may be right for you if you’re planning to stay in your home for an extended period and you’re seeking to lock in a rate. So as long as you don’t plan on selling your home within the fixed period this could be a good option for you.
The interest rates are rising or expected to rise
In a market where interest rates are expected to rise, locking in a fixed-rate mortgage can protect buyers from potential future increases. During the pandemic, the utilisation of fixed-rate loans increased significantly, protecting borrowers from rate increases for an average of 3 years. This gave borrowers time to get their finances in order and prepare for the end of their fixed terms as well as saving them from the higher interest costs when rates started to rise. If market trends point to more interest rate increases in the future, you can benefit from fixing your rates now before they happen.
Get a Fixed-Rate Home Loan
Is a fixed-rate loan right for you? Check your financial needs, your capacity to pay higher repayments if variable rates rise as well as your plans in the next few years. If you’re unsure, don’t hesitate to seek help from a mortgage professional. We can help you weigh the pros and cons of a fixed-rate loan to see which is the best choice for you. We can also help you get the best rates from the right lenders. Talk to us to know more.
