A cautious way of borrowing money, this loan will follow a pre-determined rate of interest for a given time interval – one year, two years, three years. In an uncertain rate environment, fixed rate loans offer some certainty and comfort, which can be appealing to new homeowners who are taking on the largest debt of their lifetime. Fixed rate has a number of advantages for a first homebuyer.
These include an interest saving if rates increase during the fixed term of the loan and the knowledge that your monthly repayments will remain the same.
With this certainty, it’s easier to budget for the medium to long term. If you fix your loan at the bottom of the market, you can reap the benefit of a secure and low rate when the rest of the market bears the risks of higher interest rates. On the other hand if interest rates fall, you are stuck with the higher fixed rate. This is extremely handy for those with young families or those with their first mortgage who are unsure of the impact their repayments will have on their lifestyle.
At the moment, fixed rate loans are around 0.5% to 1% higher than their standard variable rate counterparts, so think very carefully and crunch the numbers before locking in your rates. The key disadvantage of fixed rate loans is that once you’re locked into one, it can be quite expensive to get out. If you picked the wrong time to fix, you can end up paying more interest than you would otherwise have with a standard variable rate.
Also, fixed rates are often devoid of features that enable you to pay off your mortgage faster.
Fixed rate mortgages will appeal to any borrowers who seek a stable interest rate and the peace of mind that their monthly outgoings won’t change, regardless of what the economy is doing.
Fixed rate loans allow you to ‘lock in’ an interest rate for a given period of time, which is of particular use if you are worried that rates will increase in the near term.
This provides certainty over repayments during the fixed term period no matter what the official interest rates are doing.
You may double up on fees and charges for both the fixed portion and the variable portion. If you pay off your loan before the due date on the fixed portion, you may be penalised. And while you will be insulated from rate rises, you won’t benefit if rates drop during the fixed term.
Borrowers who are looking for security and certainty, and are concerned that interest rates may rise in the near term.