Fixed interest rate home loans are very different to variable rate loans. Obviously the interest rate is fixed and does not move either up or down. So if you fix and variable rates fall then you are theoretically losing but if variable rates rise you win. In reality it’s best not to think if fixed interest rates in this way because historically most people lose, however what price can you put on ‘piece of mind’ – that nice feeling when you go to bed and know that you can afford your home loan repayments no matter what happens to the cash rate.
Other very important differences:
- you may be restricted in making additional loan repayments
- you probably won’t be allowed to redraw any additional repayments that you do make
- features such as offset accounts are very rare
- if you decide to ‘break’ the loan by refinancing or selling the security property, very substantial ‘break costs’ – we can be talking tens of thousands of dollars. For this reason you must never enter into a fixed interest rate unless you are very confident that you will not have to sell or refinance the property.
- there can be additional costs such as “rate lock” fees – these guarantee that the interest will not increase for usually up to 90 days. After that period the rate that applies on that day will apply to your loan and this is what happens if you don’t take a rate lock option. Expect to pay around 0.15 percent of the loan amount for a rate lock although some lenders offer this for free.