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