Fixed Rate Loans for Peace of Mind

With the mortgage rate increases likely in the near future consider fixing the rateon all or part of your mortgage.

About Fixed Rate Loans

Unlike a variable rate loan, which fluctuates according to market pressures, a fixed rate loan will remain the same during the period for which it has been fixed thus providing protection from rate fluctuations. Loan payments remain fixed during the selected period. A loan can be fixed for periods of one to five years, with some lenders now introducing longer fixed rate periods up to 15 years. The borrower is charged a premium or higher interest rate in return for a longer period.

Funding for fixed interest rate loans come from different funding sources. Lenders borrow money on fixed terms to lend on fixed terms. Any change to the terms can cause them to lose money, which in turn they pass on to the end user - the borrower. Therefore the lender will usually place restrictions on extra repayments during the fixed period. In the event that the borrower wishes to discharge a loan before the fixed term has expired, the lender will charge a penalty or break cost to compensate for the economic loss caused by the rate adjustment as well as the standard administrative charge.

In most cases the break fee will be the value of the foregone payments.

Most fixed rate loans will not offer a redraw facility. At the end of the fixed term the lender may offer another fixed interest period otherwise the loan will revert to a premium priced variable product. The opportunity to refix the interest rate may incur an additional cost.

As you can see the issues are complex and a reputable mortgage broker can help you to sort through the many fixed rate products offered by dozens of banks and other lenders.

Capped Rate Loans

Capped Rate Loans are another way to protect your repayment levels and also take advantage of the drops in interest rates.

An alternative to a fixed rate loan is a capped rate loan. With this type of loan the interest rate is not allowed to rise but the borrower will benefit from any falls that may occur as the official interest rate falls. Some lenders may charge a premium on a capped rate loan - a one of cost to the borrower. At the end of the capped rate period the interest rate may rise, and the borrower may incur additional costs to switch to another product with the same lender.

• Choosing between Fixed Rate or Variable Rate home loans
• Why variable rates vary: click here
• Tips for beating home loan interest rate increases

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