Fixed Rate Home Loans — Fact Sheet

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This fact sheet is reproduced for general information purposes only.

It is an industry-standard explanatory document and has not been authored by Model Mortgages.

It does not provide personal advice.

Fixed rate home loans

A fixed rate home loan allows you to set your interest rate for a period of time. This is usually in the range of one to five years, although in some cases a longer period may be available.

Fixing your interest rate can be a suitable option for some people. However, it is important to be aware of how fixed rate loans work and the trade-offs involved.

Things to be aware of

• Fixed rate home loans often have higher interest rates than variable rate home loans.
• Generally, the longer the fixed rate term, the higher the interest rate is likely to be. For example, a five-year fixed loan will usually have a higher rate than a three-year fixed loan.
• If interest rates do not rise, or if they fall during your fixed rate period, you may pay more interest than you would have with a variable rate home loan.
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What’s good about fixed rate home loans?

• During times of low interest rates, locking in a fixed rate can work to your advantage. You can retain a low rate for a fixed term even if rates rise steeply. Depending on the lender and the rate secured, this may reduce your repayments and the total interest paid over the loan term.
• Your repayments remain the same during the fixed rate period, which can make budgeting easier.

Things to consider

Less flexibility

Fixed rate loans generally do not offer the same flexibility as variable rate loans. For example, you may not be able to make extra repayments or redraw additional amounts paid into the loan.

Some lenders do allow extra repayments, but usually restrict the amount that can be paid during the fixed term or per year.

No offset facilities

Most lenders do not allow offset accounts on fixed rate loans. Where offset facilities are available, they are usually limited or partial. Full 100% offset accounts are only offered by some lenders.

Break costs

You can choose to break your fixed rate loan, but a break cost may apply if:

• you exit the loan before the end of the fixed rate period
• you prepay part or all of the loan before the fixed period ends
• you switch to another product, interest rate, or repayment type
• you sell the property during the fixed rate period

Calculating break costs

Each lender uses a different formula to calculate break costs, and these formulas are complex.

In general terms, if the current wholesale interest rate for the remaining fixed period is lower than the wholesale rate when the fixed rate commenced, a break cost is likely to apply.

When the fixed rate is set

The fixed rate is usually not set until settlement. Some lenders apply the fixed rate available at settlement or at the start of the fixed rate period, while others apply the rate available when you sign your loan offer.

This may work in your favour or against it. Some lenders offer a rate lock option (see below), which may involve a fee.

Remember

• If variable rates increase, you may pay more interest than if you had fixed your rate. This depends on the size and timing of rate increases and how long you hold the loan.
• If variable rates stay the same or decrease, you may pay less interest than if you had fixed your rate, assuming the fixed rate was higher than the variable rate over the same period.

Rate lock

Some lenders offer the option to lock in a fixed rate before settlement. This is known as a rate lock and usually involves paying a fee, typically calculated as a percentage of the loan amount.

This fee can be significant, although some lenders may not charge it or may waive it.

Rate lock provides certainty that the fixed rate will not change between the time the lock takes effect and settlement.

Most borrowers who choose to rate lock do so when submitting their application. While it can be done later, lenders may announce rate changes at any time before settlement. Once a rate increase is announced, the opportunity to lock in the previous rate is lost.

If you choose to rate lock, note the expiry date. Rate locks usually last for 90 days. If settlement does not occur before expiry, the rate lock may need to be renewed, which may involve paying another fee. This is particularly relevant for long settlements.

Disclaimer

The information provided in this fact sheet is not legal, taxation, or financial planning advice.

It has been prepared without considering your objectives, financial situation, or needs.

All loan products are subject to lender criteria and approval. Fees, terms, and conditions apply.

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