Fixed Rate
While variable rates have historically been the most popular choice for Australian borrowers, many home buyers turn to fixed rates in uncertain economic times. Others choose to fix their rates simply to secure their mortgage repayments and provide financial certainty for a specified time. As the name suggests, this loan type involves locking a mortgage into a fixed interest rate for an agreed period - usually one, three or five years.
An increasing number of first homebuyers are choosing this type of loan as they enter the property market, and it is easy to see why. The fixed rate offers certainty when interest rates may be volatile. Knowing your repayments are locked in can make it easier to budget, which can be a great comfort to first homebuyers, especially if interest rates are on the way up.
The key to making this loan type successful is timing. This means locking in the fixed rate when rates are lower. People often decide to lock into a fixed rate too late, usually after rates have already started to climb.
If your loan is fixed while interest rates are low, and a series of rate increases follow, borrowers are insulated from these.
The obvious downside of this is that interest rates may fall, but the borrower remains locked in to the loan at the higher rate. This can result in paying more interest than you would have under a variable loan. Indeed, our research has shown that fixed rates tend to be more expensive over time in 70% of circumstances than a variable rate.
Another disadvantage of the fixed loan is the expense that can be incurred if you try to pay out your mortgage before the fixed term is up. Many lenders impose penalties to borrowers who want to pay off their mortgage or refinance with another lender. These costs will vary, so it is good to understand this clause before signing any agreement to fix your rate.
