How To Avoid The fixed Rate Home Loans Traps
Fixed rate home loans rise and fall in popularity as market conditions change. As variable interest rates start to rise most consumers seek the comfort of a fixed rate to immunise themselves against increasing loan repayments.
Whilst fixed rates will always have a place in the home loan market there can be a sting in the tail if you do not do your homework. Let’s look at some of the facts about fixed-rate home loans so you can decide whether they will suit your circumstances or not.
Fixed rate home loans become a mini contract within your overall home loan agreement. This means that when you choose a 1, 2, 3, 4, or 5 or more fixed rate term, you are making a commitment with the bank to keep the loan for the duration of that period.
If you wish to sell your home all refinance your loan to another lender, you will have to pay out the fixed rate home loan. The lender is entitled to charge you for breaking your contract and you will have to pay whatever the bank calculates as its loss. For example if your fixed rate is set at 6% and the variable rate on the day you pay your loan out is 4%, you are likely to be paying a hefty figure. On the other hand if the variable rate was, for example 8%, the penalty would be minimal or maybe even zero.
As interest rates fell during the global financial crisis many borrowers who had previously locked themselves into relatively high fixed rate terms discovered that the payout figures were prohibitive, rendering their plans to refinance to a low variable rate impossible.
The greatest benefit of a fixed rate home loan is that it cannot change. So if you think that home loan variable rates are on the increase then you should consider fixing your home loan for a period that gives you the greatest comfort. It is extremely difficult to predict the market too far in advance so it is no surprise that most borrowers choose a three year term. In any case you should make your own decision about this and do your own assessments because no one will give you a guarantee.
One important point to consider is that you do not have to fix your entire loan. This means that you can choose to fix a portion of your loan for any period of time that you wish. For example if you have a $300,000 loan you can choose to:
- Fix the entire amount.
- Fix $150,000 for three years and leave the rest of variable.
- Fix $100,000 for two years and fix $100,000 for three years and leave the rest of variable.
In other words the choices are endless and completely at your discretion. Note that most banks require a minimum amount for anyone loan account, generally around $50,000.
In a nutshell, fixed-rate home loans provide you with immunity against rising variable rates and can give you peace of mind in times of uncertainty.
