With interest rates at an all-time low, taking the option of locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.
When purchasing a property, borrowers can 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 if they sell or refinance.
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,” Tracy says.
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 terms,” Tracy says. “The three- or five-year terms are generally the most popular for customers because a lot can change within that amount of time.”
Further to this, some lenders offer the option to lock in your rate at the time of application. This means that you can apply for the fixed-rate loan before you find the property you want to buy.
“When you apply for a fixed rate, at the point of application you can pay a fixed rate lock-in fee which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate,” Tracy explains.
“I tend to discuss the individual situation with clients, for example if they are building a home it might take months before the bank actually fund the loan which is when the fixed rate is set. For these clients it might be a good idea to pay the fee to secure the rate. On the other hand if a client has found a property and have agreed to a quick settlement a rate lock may not be necessary. Make sure your lender discusses this with you so you do not get any nasty surprises when you get that first loan statement.”
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 interest loan grants further peace of mind for those borrowers looking to budget precisely rather than be susceptible to rate fluctuations.
Let Tracy work out the best option for you! She is known to save her customers thousands, so give her a call for a free consult today! Call 0437 135 763