If you’re looking for a home loan you need to make a choice. Do you go for a variable rate or fixed rate loan?
Each has their pros and cons. What we will look at here is what you need to consider before choosing a fixed rate loan.
Before we begin, please note that the following information is general. You should talk to an expert before choosing any type of home loan.
What is a Fixed Loan and Should You Fix?
The idea behind a fixed loan is simple. It is a loan for which the interest rate stays the same for a set period of time. This time will vary depending on the lender and the needs of the borrower.
So you may be asking whether you should fix?
This is a tough question to answer. You need to consider your own circumstances and the state of the economy.
It is usually better to fix your rate when the economy is stable. During this time, interest rates will be lower. In turn, a fixed rate could protect you from future increases.
Fixing when interest rates are high can place you in a bad position. Many people do this because they want to get a rate locked in before interest rates get higher. However, this prevents them from taking advantage of low rates once the economy stabilizes.
As a general rule, a fixed rate is a good choice during times of economic stability. You can read our 2017 bulletin on whether now is the right time to fix your interest rate for more insight.
There are additional issues that will affect your decision to fix your rate. For example, if you’re looking to sell your home it is often better to have a variable rate. The same applies if you want to make bigger repayments or hope to refinance your home.
In the above cases, you could face break costs on a fixed rate loan. That’s because those actions require you to break the fixed contract. Broken contracts often result in lenders having to make multi-thousand dollar payments. Lenders then pass these payments onto borrowers as break costs.
Which Lender Should You Choose?
Each lender offers a variety of fixed rate loans. This is due to the fact that every lender looks at the market in their own way. One may think interest rates are preparing to spike. Another may see the rate going down.
This means that going to only one lender and trying to get the best deal from them won’t always provide you with a loan that’s right for you.
As a general rule, speak to as many lenders as you can. At the same time, be mindful of racking up too many enquiries on your credit report.
You could also talk to an expert, such as a uno home loan adviser. With the right help, you can find lenders that offer strong fixed rate loans. Mortgage brokers can also help you access discounts on fixed rate loans.
How Can You Figure Out Interest Rate Trends?
The simple answer is that you can’t. Economists all have different opinions on how rates will change in the future. The same is true for lenders. This means that it is very difficult to predict what will happen to interest rates in the future.
As such, getting a fixed rate loan always carries some risk. If you choose the wrong time, you lock yourself into a higher rate than that of the current economy.
A Word on Rate Locks
Those applying for fixed rate loans also have to keep changing rates in mind. It is possible for a lender to change their fixed rate in the time between a borrower applying for and getting accepted for a home loan.
If this happens, borrowers have to take the new rate. Should the rate increase, this places the borrower in a bad position.
This is where rate locks come in. Many lenders allow you to pay a fee to lock in the rate offered at application. Such fees range from between $400 and $700 dollars. Some lenders prefer to charge a percentage of the loan, usually in the 0.15% range. This will protect you from rate changes during the application process.
A rate lock lasts for 90 days at most. Also, you cannot get one if you are in the pre-approval stage.
Do Fixed Rate Loans Offer Flexibility?
Most traditional fixed loans offer very little flexibility. That’s what leads to the break costs mentioned earlier.
That said, in recent years more lenders have been building some flexibility into their fixed rate loans. Some of these new home loan products offer the following:
• The option to pay interest only.
• The ability to make more payments without incurring break costs.
• Offset and redraw options.
• Lower fees for maintaining the loan.
The Next Step
Fixed rates offer protection against changing interest rates. They also prevent you from taking advantage of such changes if interest rates fall. As such, they offer stability that sometimes comes at a cost.
Your choice will depend on your situation. A fixed loan may work for you if you can make the repayments comfortably and you want the loan to stay stable. Just bear in mind that you may pay more in interest than those on variable loans.
Speak to a uno adviser before making any decisions.