Interest rates can be hard to predict and full of uncertainty. As we recover from the global financial crisis, fixed rate loans have become quite popular as Australians put measures in place to shield themselves from the prospect of interest rates continuing to rise. It is important to pay attention to economic trends to determine if a fixed rate loan is right for you.
In order to decide if you should fix your loan you first need to have a solid grasp on what that means. A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. The time period of these loans can vary, but you can usually “lock in” your repayments for between 1-7 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left of the loan.
For a borrower who is keen to have a loan repayment that is more predictable a fixed rate loan could be a great option. There are several fixed rate loans available that are quite flexible with competitive interest rates, and as they offer the borrower the chance to ‘lock in’ an interest rate, it gives borrowers certainty of exactly what their repayments will be over the period that the loan is fixed. If the official cash rate is raised by the RBA and if lenders then increase their variable interest rates, it will not affect a fixed rate loan during this period.
The majority of fixed-rate home loans allow borrowers to make additional repayments towards the loan. However, if you plan to make additional repayments to pay off your loan sooner, make sure you do not take out a loan that charges you fees for making early repayments. Some fixed rate loans also include redraw facilities, allowing you to withdraw cash from the equity in your home up to the amount you have paid in additional repayments.
