The option of locking in an interest rate on your home loan to guard against possible future fluctuation may be attractive. However, it pays to know the ins and outs of a fixed-rate loan before committing to one.
When purchasing a property, borrowers can decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.
Fixed-rate loans usually come with a few provisos. For instance, borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early.
On the flip-side, locking in the interest rate on your home loan for a set period of time can offer you some protection from the volatility of potential rate movement.
Fixed rates are locked in for an amount of time that is prearranged between you and your lender. There are some lenders that offer seven-year or 10-year fixed terms, but the three-year or five-year terms tend to be the most popular terms.
Fixed-rate loans can also be pre-approved. This means that you can apply for the fixed-rate loan before you find the property you want to buy.
When applying for a fixed rate, you can pay a fixed rate lock-in fee at the point of application which will, depending on the lender, give you between 60 and 90 days from the time of application to settle the loan at that fixed rate. Alternatively, you can choose to lock the rate in at the time of actual approval.
A pre-approval helps you to discern how much money you are likely to have approved on an official application. Knowing that your potential lender will offer a fixed-term interest loan provides even further peace of mind for those borrowers looking to budget precisely as rather than being susceptible to rate fluctuations.
For more information regarding fixed rate loans, contact the team at My Property & Finance today!