When you take out a home loan, there are three main options available to you. You can choose to ‘fix’ your home loan rate, locking in your interest repayments for a set period of time, or you can choose a variable rate, which could see your interest payments going up or down, based on changes in the market rate and the decisions of your lender. You could also choose to split your loan, meaning you may be able to combine the two at a ratio you think is favourable.
One option would be to fix your home loan at a steady interest rate for two years. If you’re considering it, here are some things that might help you make your decision, as well as some potential advantages and disadvantages.
What is a 2-year fixed home loan?
A two-year fixed rate home loan is one in which the interest rate you’ll pay on the loan is locked in place or ‘fixed’ for a period of two years, from the start of the loan. This means that throughout this entire two-year period, your required repayments will remain consistent, and your interest rate will not fluctuate.
What are potential advantages of a 2-year fixed home loan?
There can be a number of possible advantages to locking in an interest rate, whether you choose to do it for two years or a different length of time. The advantages of fixed home loan rates can include:
- A sense of certainty in your repayments: On a two-year fixed rate, your loan repayments will remain the same from month to month for the entire period, meaning you’ll be able to budget for other expenses knowing how much your mortgage will cost, and will not see your rates go up in that time. In addition to the interest rate, it may be a good idea to consider the comparison rate in working out what you may be able to afford in repayments.
- The potential to save money on fees and charges: Variable rate loans come with added features like offset accounts and redraw facilities, which can make them more expensive. Fixed rate loans tend to come without these features, meaning that the associated fees and charges tend to be smaller.
What are potential drawbacks of a 2-year fixed home loan?
Of course, fixed loans – whether the rate is locked in for two years or longer – can also come with some potential drawbacks. These include:
- The potential to miss out on a lower interest rate: When you lock your rate in, you will not need to make higher repayments when there are interest rate rises. However, if your lender lowers their variable rate, you will not be able to take advantage, as you’ll remain locked in to your current one.
- Breaking out early could mean paying break fees: If you are on a fixed rate loan and wish to break it early, then typically, your lender will charge you a break fee to get out of the contract. There is no set amount for break fees, but depending on the size of your loan, they can be expensive.
- A lack of features: Variable rate loans typically come with features like an offset account, which can bring down the balance of your loan while being used as an everyday bank account, whereas fixed rate loans do not typically come with these, and if they do, you may need to pay additional fees to access them.
- Inability to make additional repayments: Generally speaking, if you are on a fixed rate loan, you will be unable to make additional repayments to bring down the balance of the loan. Note that there can be some flexibility on this, depending on the lender.
Can you break a 2-year fixed home loan?
Depending on the terms and conditions of a loan, it may be possible to break it before the loan term is up. There may be any number of reasons you wish to do this – you may want to sell your house, or refinance with a different lender, or you may simply want to move to a new loan product.
Explore further: Breaking a fixed-rate home loan: What are break costs?
Whatever the reason, the terms of your contract may allow you to break your loan early, but you may be charged a ‘break cost’ or a ‘break fee’. This is an amount of money that is intended to compensate a lender for lost profits they might face as a result of a borrower leaving a home loan early. While the cost of break fees varies, it generally takes into consideration:
- the interest rate you locked in (compared with the current interest rate)
- how much time remains on your fixed-rate term
- the amount you originally borrowed
How long can you fix a home loan for?
You can generally choose to fix a home loan for anything up to ten years, and the amount of time you choose is a matter of your preference and what your lender is willing to offer. Depending on your needs, you may only want to lock in your interest rate for a short amount of time, such as one or two years. Alternatively, you could lock it in for three, five or even 10 years, if you want the certainty of a fixed rate for a longer period of time. The interest rate will vary depending on the term you choose.
When is your interest rate locked in?
If you are considering a two-year fixed home loan, or any fixed home loan, one important factor to keep in mind is that your interest rate will be fixed at the date you settle on the property, not the date you applied for the loan. This means that if rates change between the time you apply and the time you settle on a house, you could end up paying more or less interest for the two-year period.
If you want certainty in your rate, some lenders will offer you the ability to lock in a rate before settlement, but you may be asked to pay a lock-in fee to guarantee it.
What happens when your fixed loan term ends?
Generally speaking, when a two-year fixed term (or any fixed term) ends, you will revert to a variable rate for the remainder of your home loan. If you are happy moving to a variable rate, then you could choose to do this. Alternatively, you may be able to refinance your loan, either with your current lender or a new one, and you may move back onto a fixed rate at this time.
Which lenders have the lowest fixed-rate home loans?
If you’re in the market for a two-year fixed rate home loan, you can take a look at the winners of Canstar’s Fixed Rate Home Loan Awards to find out which lenders offer value for money to Australian home buyers. You can also compare home loans with Canstar to find a lender with a low two-year rate that suits your particular needs.
Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.
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