Fixed Rate Loan

A fixed rate loan has a fixed interest rate which doesn’t change during the term of the fixed rate period. Fixed rate terms vary between 1, 2, 3, 5 and 10 years. Extra repayments on a fixed rate loan are limited as fixed loans usually have strict limits for how much extra the borrower can pay off the loan in a prescribed period of time. Fixed rate loans allow the borrower to calculate the required exact repayments for 1 to 10 years which may help you to budget. A fixed rate loan can insulate the borrower from rising interest rates as your regular repayments remain the same regardless of changes to underlying interest rates.

Upside

• Your mortgage repayments won’t change during the fixed loan term and are unaffected by increases in interest rates.

• Your ability to budget is enhanced because your loan repayments are fixed during the fixed rate loan period.

Downside

• The interest rate on a fixed rate loan will not benefit from a fall in the Reserve Bank Interest Rate because your repayments are fixed under a fixed loan agreement.

• During a period of falling interest rates, a borrower using a fixed rate loan may be paying higher mortgage repayments for a prolonged period of time.

• In the event the borrower wants to exit the fixed loan agreement and interest rates have fallen since the loan was approved, significant financial penalties can apply.

• Early repayments are limited during the Fixed loan period