Why a five-year fixed rate home loan could be an option to consider.
Locking in a rate for five years means your payments won't change during this time. This allows you to plan ahead by knowing exactly how much you need to repay every month. Five-year fixed rate home loans are a common type of loan and are offered by almost all lenders.
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What is a five-year fixed rate home loan?
A fixed rate home loan locks in your interest rate for a fixed period - in this case, five years. During the course of your term, your repayments won’t change. This is in contrast to variable interest rate home loans, which can change according to your bank's response to economic factors. A fixed rate home loan is very secure, and is ideal for those on a tight budget who can’t afford increasing monthly mortgage repayments. A five-year fixed rate home loan is also appropriate for investors who need to keep track of their cash flow.
How do these loans work?
When you sign up for a five-year fixed rate home loan, your lender will lock in the interest rate. Once the loan term ends, your loan will either revert to the lender's standard variable rate, or you'll be offered the option to fix your loan for a new period.
With fixed home loans, you generally can’t make additional repayments during the fixed term. If you are permitted to make additional repayments, these are usually limited to a certain amount per year. If you do repay your home loan within the fixed five years, you may need to pay an early repayment fee.
A look at early repayment fees
Fixed rate home loans also tend to have fewer additional features. For example, you may not get the option of a 100% offset account or a partial offset account. Some fixed home loans do offer these features, but it’s not the norm.
What are the types of five year fixed rate mortgages on offer?
Full featured home loans
Full featured home loans come with a complete range of features that may include the option to make additional repayments, or 100% offset accounts. However, these types of home loans do tend to attract higher fees, and fixed rate home loans seldom offer these features.
Package home loans
Package home loans bundle your home loan with other products such as credit cards, personal loans and savings and transaction accounts. They often carry annual maintenance fees.
Basic home loans
These home loans are your foundation home loans. They don’t have the frills and additional features that other home loans have, but they do offer very competitive rates and fees. Basic home loans are a good way to help you save money, especially if you don’t require any additional features.
Credit impaired home loans.
It can be difficult for those with a bad credit rating to be successful in their home loan applications. Fortunately, there are fixed rate home loans available for those with bad credit. You may be charged a higher rate or fee with this type of home loan to compensate for your credit risk.
Loans for the self employed
These are typically referred to as low doc home loans. Low doc home loans are designed for those who are self-employed or investors who are unable to provide the proper proof of income required in their home loan application. Low doc home loans allow you to provide less documentation, or alternate documentation for your application.
How to compare home loans
Once you have decided that a five year fixed rate home loan is right for you, there are some easy ways to compare the home loans available to help you select one that suits your needs. You should first consider your lifestyle, income and how you plan on using your home loan to help you decide what features are important to you from a home loan. Some points to use in your comparison include:
Rates
Make sure you compare both the interest rate and comparison rate to ensure you are getting a great fixed rate. The interest rate you lock in will have a direct impact on your repayments so it’s worth taking the time to compare your options and find a good rate.
Fees
It’s important to compare all the fees you may be liable for over your five-year fixed term. Fees can include rate lock fees, annual fees, establishment fees and fees for making additional repayments. Fees tend to add up so it’s important to look for a home loan with lower fees over the duration of your fixed term.
Features
Although fixed rate home loans do typically have fewer features than variable rate home loans, it is still worth comparing the features of each home loan and what they can offer you. For example, can your home loan offer you an offset account? Or redraw facility? Or can you make additional repayments?
Pros and cons of a home loan fixed for five years
Pros
- Security in repayments. With a five-year fixed rate home loan, your repayments won't change for five years. This is much longer than most other fixed home loans and can give you extra peace of mind.
- Easier to budget. When you know the repayments you will need to make every month for the next five years, budgeting becomes much easier. You can budget far in advance and don’t have to worry about your monthly repayments changing. If you’re budgeting for a holiday or a new car, you won’t get hit with a last minute increase in repayments.
- Immunity from rate rises. If you’re locked into an interest rate and the RBA raises the interest rate, you will effectively have a lower interest rate than most variable home loans.
Cons
- You'll have to stick it out for five years. Five years is quite a long time. If you were planning on selling your property or moving on, this type of home loan will not be appropriate for you. A five-year fixed rate may also not be appropriate for people fixing their home loan for the first time.
- Discharge fees. Fixed rate home loans tend to have high discharge fees if you exit your home loan during the fixed term, so it’s important to make sure you stick with the loan during the fixed period.
- Lack of flexibility. Fixed rate home loans tend to have less flexibility and fewer features when compared to a variable rate loan.
Things to keep in mind with five-year fixed rate home loans
With a five-year fixed rate home loan, it’s important to ensure you don’t exit the home loan during the five year fixed period to avoid exit fees. Also, it’s important not to make extra payments if your lender doesn’t permit them. Otherwise, you may again be hit with additional fees.
FAQ about five-year fixed rate home loans
What lenders offer five-year fixed rate home loans?
The majority of lenders offer five-year fixed rate home loans. If a five-year fixed rate home loan is something you want, make sure you compare them above.
Is five years the longest fixed rate term I can get?
In Australia, the maximum length of a fixed rate mortgage, depending on the lender, is usually 10 or 15 years. Usually most smaller lenders will only offer popular fixed terms of between one and five years.
Are there any other options other than fixed or variable rates?
Yes, there’s also the option of having a split loan. This is where your home loan is split between both a fixed and variable scheme so you can get the best of both worlds.
