Generally speaking, there are three categories of home loans available in Australia:
- fixed-rate loans, where the interest repayments remain the same
- variable-rate loans, where the interest can go up and down
- split loans, which are a combination of the two.
If you’re contemplating a one-year fixed rate loan, here are some things that might help you make your decision.
What is a 1-year fixed home loan?
A one-year fixed rate home loan is one in which the interest rate you’ll pay on the loan is locked in or ‘fixed’ for a period of a year. This means that your required repayments will remain consistent for that whole length of time, irrespective of whether your lender raises or lowers interest rates.
What are potential advantages of a 1-year fixed home loan?
Fixed loans, whether the rate is locked in for one year or longer, have a number of potential advantages, including:
- The certainty of knowing that your repayments will remain stable and you will pay the same from month to month.
- The fact that a fixed loan can be cheaper than a variable one, because it comes without features like offset accounts and redraw facilities. This means that you can potentially save on fees and charges.
What are potential drawbacks of a 1-year fixed home loan?
Fixed loans, whether the rate is locked in for one year or longer, can also come with some potential drawbacks, including:
- The potential to miss out on a lower interest rate if interest rates fall but you have locked yours in with your lender.
- The fact that you may have to pay a break fee if you choose to end your fixed loan term early or refinance to another institution.
- The lack of features that come with some variable rate loans, such as offset accounts.
- The fact that you may be penalised for making additional repayments. Note that there is some flexibility with this, depending on the lender, and some will allow borrowers to make additional repayments on a fixed-rate loan.
Can you break a 1-year fixed home loan?
If you want to break your fixed-rate loan before the fixed term ends, it could be possible, depending on the terms and conditions of the loan, but you might be charged a “break cost” or a “break fee”. This is intended to compensate the lender for loss of profits they might face as a result of you breaking the terms of the contract.
Break fees will vary, but are generally calculated with consideration of the interest rate you locked into (compared with the current interest rate), how much time remains on your fixed-rate term, and the loan amount you originally borrowed.
→ Explore further: Breaking a fixed-rate home loan: What are break costs?
How long can you fix a home loan for?
The length of time you choose to fix a home loan is negotiated between you and your lender. You can generally choose the time period for which you lock in or ‘fix’ your interest rate – depending on who you take out a home loan with and what your needs and priorities are, this could be 1, 3, 5 or even 10 years.
How do you lock in a low-interest rate?
When you take out a one-year fixed rate home loan, or any fixed rate home loan for that matter, it is important to keep in mind that your interest rate will typically be locked in at the date you settle on the property, not the date you applied.
If interest rates have changed between the time you apply for a fixed loan product and the time you settle, you may end up paying a higher rate. Note that some institutions will lock in a rate before settlement if you are willing to pay a lock-in fee to guarantee it.
What happens at the end of a fixed home loan term?
When the fixed term of a home loan comes to an end, whether you locked in your interest rate for one year or longer, the loan will typically revert to a variable rate for the remainder of the term, which could be many more years. At the end of the fixed rate term, you are able to refinance with your existing lender, or another.
Which lenders have the lowest fixed-rate home loans?
If you’re in the market for a one-year fixed rate home loan that suits your particular needs, you can compare home loans with Canstar to find a lender with a low rate. You can also view the winners of Canstar’s Fixed Rate Home Loan Awards to find out which lenders offer value for money to Australian home buyers.
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