Low fixed interest rates have given young Aussie first home buyers and seasoned investors the confidence to buy property.

The key reason is that fixed rates offer buyers the opportunity to plan ahead, treating their home loan as a regular bill rather than an unknown variable. A fixed rate home loan allows you the opportunity to lock in an interest rate for the fixed term period. For example, a 3 year fixed term home loan will remain at that rate for 3 years regardless of variable interest rate movements.

Most lenders place restrictions on their fixed rate loans such as:

• Restrict extra repayments to a limit each year beyond the minimum repayments
• Do not allow the borrower to redraw extra repayments during the fixed loan term
• Do not allow 100% offset accounts to be attached to the loan.
• Charge break fees if the borrower exits the fixed loan term early. Break fees can cost thousands of dollars.

However, some lenders will allow unlimited extra repayments, let you redraw extra repayments and attach an offset account to the fixed rate home loan. A Trusted Mortgage Broker will advise you on all of these options. An assessment of fixed rate versus flexible features will need to be considered before selecting any fixed rate home loan to ensure you receive a home loan that is not unsuitable for your individual needs.

Always be mindful that break fees can cost you thousands of dollars. You should refer to the terms and conditions of your home loan for the specific situations where you may be charged a break fee.

The lender will charge a break fee if:

• You repay the home loan in full before the end of the fixed rate term.
• You make a repayment in excess of the allowed amount per annum. The allowed amount is the additional payment you can make in a year before break costs may become payable and that amount is set out in your loan agreement with your bank.

What is a break fee?

 THE PROCESS OF FIXING INTEREST RATES

When a lender gives you a fixed interest rate loan, they obtain the funds for the loan through a transaction at wholesale interest rates.

WHAT ARE BREAK COSTS?

Break costs are an amount equal to the lenders reasonable estimate of their loss arising as a result of you breaking your loan when it is at a fixed rate. The lender suffers a loss when wholesale market interest rates fall between the start of the fixed rate period and the time you break the fixed rate period.

You break a fixed rate period on your loan when, during the fixed rate period:

• you prepay your loan in part or in full; or
• the total amount owing becomes immediately payable because you are in default.

WHEN ARE BREAK COSTS PAYABLE?

Break costs ARE payable on your fixed interest rate loan when:

• you prepay all of the total amount owing on your loan before the end of the fixed rate period; or
• you prepay during a fixed rate period in aggregate more than the amount on which the lender does not charge a break cost. That amount or how the lender calculates that amount is set out in your loan agreement; or
• if the total amount owing on your loan becomes repayable immediately during a fixed rate period because you are in default.

WHY ARE BREAK COSTS NECESSARY?

When you break your fixed rate period, the Bank has to break its wholesale interest rate arrangements and, if wholesale market interest rates have dropped, this causes a loss to the Bank.

HOW ARE BREAK COSTS CALCULATED?

The lenders calculate break costs using the break costs method set out in the General Terms and Conditions of your loan agreement. The break costs method estimates the lenders loss but does not necessarily reflect any actual transaction that they may enter into (either before or at the time of the break). Break costs are calculated on wholesale market interest rates. Those rates may not be the same as the fixed interest rate for your loan or other fixed interest rates that apply to their other products. They may be lower or higher.

Rate Lock Guarantee

With our historically low fixed interest rates, many customers continue to choose a fixed rate home loan. To protect our customers and ensure they get the fixed rate we have offered to them we have a rate lock guarantee that we can discuss with our clients. This will ensure that they are not caught out by fluctuations in fixed rates between approval and settlement, enhancing their ability for rate security.

What is a rate lock?

Rate Lock guarantees the customer the fixed or guaranteed interest rate of their choice for 90 days and it can be applied anytime during the home loan application. The 90 days may vary with each lender.

Benefits

• Rate Lock gives customers certainty that their rate will be the same as when they first applied.
• Customers can enjoy the assurance of knowing exactly what their repayments will be based off the interest rate they locked in.
• Fixed rates allow customers to budget accurately and plan their finances before their loan even funds.
• If the fixed rate further reduces during the Rate Lock period the customer can request the Rate Lock to be broken prior to settlement for the reduced rate to apply. However, if the customer wishes to take out a new rate lock guarantee to lock in the reduced rate, an additional rate lock fee is applicable. Some banks will honour the lower rate and do not ask for another rate lock fee.

Trusted Mortgage Broker has a great range of mortgage calculators to help with all those tough decisions that come with finding the right loan. Have a look at our calculators on our website to help you further.