When purchasing a property, borrowers can generally decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.
Fixed-rate loans usually come with a few provisos: borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early or switching to variable interest during the fixed rate period.
However, locking in the interest rate on your home loan can offer stability.
For those conscious of a budget and who want to take a medium-to-long term position on a fixed rate, they can protect themselves from the volatility of potential rate movement.
Fixed rates are locked in for an amount of time that is prearranged between you and your lender.
There are some lenders that offer seven-year or 10-year fixed terms, but generally one to five years are the most popular. The three and five-year terms are generally the most popular for customers because a lot can change in that time.
You can choose to lock the rate in at the time of actual approval.
Pre-approval helps you to discern how much money you are likely to have approved on official application. Knowing that your potential lender will offer a fixed-term fixed interest loan gives further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.
In addition, borrowers should consider the possibility of arranging a ‘split’ loan. This option allows you to split your loan between fixed and variable rates – either 50/50 or at some other ratio. This can allow you to ‘lock in’ a fixed interest rate for up to 5 years on a portion of your loan, while the remainder is on a variable rate which may give you more flexibility when interest rates change and potentially minimise the risks associated with interest rate movements.
To learn more about the different types of loans, talk to our team of experts today!