Fixed rate loans

Fixed Rates Pros and Cons

Fixed rates allow you to know with certainty what your repayments will be over the course of the fixed rate term, however with that certainty comes various inflexibilities.

You may be quoted a fixed rate at the time of your loan assessment or at your unconditional approval however this does not mean this is the rate you will be given at settlement (even if a specified fixed rate is shown within your loan offer documents). Most lenders set the fixed rate at the date of settlement, so you may end up with a rate different to what was originally indicated. Most lenders give you the option to lock the fixed rate once you’ve found a property and you have provided them withthe front page of your contract of sale. This is called a rate lock and there is usually a fee for this. The amount charged is dependent on the lender.

There is a limited term that a rate can be rate locked (usually up to 90 days). Once a loan has settled, lenders usually allow borrowers who have variable rate loans the ability to fix their rate at any time. This can sometimes be done with a simple phone call to your lender. In such situations, some lenders will give you the fixed rate at the point of your phone call (provided the new “fixed rate loan offer documents” are returned within a specified time period) whereas other lenders will give you the applicable fixed rate on the day of settlement of the switch to your fixed rate.

Fixed rates usually limit how much extra you can pay off the fixed rate loan. Most lenders restrict extra payments to between $5,000 and $10,000 over and above your standard loan repayments each year. You may be able to partially overcome this issue if you split your loan part fixed and part variable because then any extra funds may be able to be paid against the variable portion of the loan. A few lenders may allow an offset account to work 100% against a fixed rate split but this is rare.

If you chose a fixed rate loan and then break the term of the fixed rate loan before the end of the fixed rate period (ie you sell the property, or decide to switch to another lender, or pay off more than the maximum allowed) then you may incur a significant break cost dependent on how market interest rates have changed since you entered into the fixed rate agreement. This break cost can only be determined by making an enquiry to your lender at the time you choose to break the fixed rate period.