A fixed home loan carries a fixed rate for a specific period. This period is usually between one and five years. Having a fixed home loan means repayments can be easily incorporated into your budget. You are also protected from increases in the interest rate meaning you could save money. However, this works both ways and if the interest happens to fall during your fixed period then you will find yourself paying more than you should.
Fixed home loans restrict the amount you can pay in the form of additional repayments or just restrict them all together. This is in contrast to variable home loans where you can make further repayments at your discretion. Further restrictions on repayments come in the form of ‘early repayment fees’. This fees are charged to the borrower when they pay back the loan within the fixed period. Borrowers will also be charged ‘break fees’ if they wish to leave or pay back the entirety of the loan before the end of the fixed terms. These exit fees can often outweigh the potential savings you made by protecting yourself from interest rate fluctuations.
Whilst these additional fees may seem daunting, for individuals who are looking for security in their home loan and want to avoid uncertainty over repayments then a fixed home loan works perfectly. It is important to understand your own circumstances and not just focus upon the face value rate when deciding upon a home loan.
We have included a clear set of pros and cons for fixed term loans to help you decided if this is the type of home loan for you.
The first few years of home loan repayments can be extremely stressful and is why this aspect is what draws a lot of people towards fixed term loans. This feature gives you peace of mind and allows you to effectively budget for repayments.
Different lenders will offer varying lengths of the fixed term and rates. So you are able to shop around to find the terms that suit you best.
Protected from a Rising Interest Rate
A fixed rate protects you from the dissaving’s of an increase in interest rates.
Loss of Flexibility
When compared to variable rate mortgages the features offered in fixed term contracts are far less flexible.
Early repayments fees and break costs can be significant charges if you choose to exit your fixed rate loan before the specified end.
Susceptible to Lower Rates
Alternatively if interest rates dropped whilst you are still in your fixed rate period you will end up paying more than you would have on a variable rate loan.