There are three broad categories of home loans available in Australia. There are fixed-rate loans, where the interest repayments remain steady from month to month, and variable-rate ones, where the interest can go up and down, depending on a number of factors. There are also split loans, which combine elements of the first two.
If you’re contemplating a two-year fixed investor home loan, here are some things that might help inform your decision, and some things to be wary of.
What is a 2-year fixed investor home loan?
A two-year fixed investor home loan is one in which the interest rate you’ll pay on the loan is locked in or ‘fixed’ for a period of two years. This means that, for the entire two-year period, your required repayments will remain the same, irrespective of whether your lender chooses to change their interest rate.
It is worth keeping in mind that if you are purchasing a property as an investor, your lender might charge you a slightly higher interest rate and offer a lower loan-to-value ratio (LVR) than if you were purchasing a home as an owner occupier. This is because lenders can view investor home loans as slightly riskier, due to the fact that you may depend on a rental income to pay the mortgage, and a disruption to this could lead to financial difficulties.
In other ways, though, two-year fixed loans for investors are similar to those for owner occupiers.
What are potential advantages of a 2-year fixed investor home loan?
There can be a number of potential advantages to fixing the home loan rate on your investment property for two years or for a different length of time, including:
- A sense of certainty from knowing that your interest rate will remain the same from month to month, regardless of whether your lender decides to move interest rates.
- Being protected from interest rate rises, if your lender decides to raise their rates within the two-year period of your loan.
- Potentially saving money on fees and charges, as fixed loans typically do not come with features like offset accounts and redraw facilities, so you will not need to pay associated costs.
What are potential drawbacks of a 2-year fixed investor home loan?
Whether you choose to fix the loan rate for your investment property for wo years or a different period of time, there are a number of things to be wary of, including:
- If your lender lowers interest rates, you will not be able to take advantage of it, as your rate will be locked in.
- You may be charged break fees if you decide to end your loan early, whether it’s because you’re refinancing or for another reason.
- You will not have access to features like offset accounts and redraw facilities, which can help streamline your everyday finances.
- You generally cannot make additional repayments on a fixed rate loan without incurring a penalty (although some lenders may allow this).
Can you break a 2-year fixed home loan?
If you want to sell your house, remortgage, or otherwise break out of your fixed home loan, it is generally possible to do so, but it will depend on the terms and conditions of the loan, and you may also be charged a ‘break cost’ or a ‘break fee’. Lenders charge these to compensate for the money that they could lose if you break out of a loan early.
Explore further: Breaking a fixed-rate home loan: What are break costs?
Break fees will vary in cost. A lender may consider factors such as the interest rate you locked in for your loan (compared with the current interest rate), how much time remains on your fixed-rate term, and the amount of money you originally borrowed.
How long can you fix a home loan for?
There is no set time that you are required to lock in a home loan for. You may choose to lock a fixed rate in for a relatively short period like one or two years, or for a longer time, like five or even 10 years. The length of time you choose will come down to your personal preferences, needs and circumstances, and you will need to agree on it with your lender.
How do you lock in a low-interest rate?
When you take out a fixed home loan for your investment property, the interest rate you pay will be locked in on the day that the loan settles. It is important to be aware of this, as this rate could be different than on the date when you applied for the loan product.
If you are concerned about rates changing between the application date and settlement date, your lender may offer you the option of locking in a guaranteed rate prior to settlement, although you will usually be required to pay a fee for this.
What happens at the end of a fixed investor home loan term?
When any fixed home loan comes to an end, whether you locked your rate in for two years or longer, it’s typically the case that you will revert to a variable rate home loan afterwards. At this point, if there is still a balance to pay on your home loan, you either have the option to:
- remain on a variable rate with your current lender,
- refinance to a new split or fixed rate with your current lender, or
- refinance to a new split, fixed or variable rate with a new lender.
What happens if you lie on your investor home loan application?
When borrowing money to purchase an investment property, it is important to be truthful about the reasons you are applying for the loan. Lying on a home loan application can have serious consequences. If your lender discovers that you have applied for an owner occupier loan but actually plan to rent the property out, they are likely to reject your application. It is likely you will also receive a black mark on your credit score, which could make other institutions hesitant to lend to you in future.
If a lender finds out that you lied on your application after it is approved, they have the right to recall your home loan. In this situation, they may give you a 30-day period to pay off the balance of the loan, after which the property will be sold off.
How do you compare fixed rate investor home loans?
If you’re in the market for an investment property and wondering about the available two-year fixed rate loans, you can start your search by comparing home loans with Canstar. Each year, Canstar gives out Home Loan Awards to the lenders that offer outstanding value to Aussie home buyers. The winning providers in the Investment Fixed Home Lender Award category may be able to offer you an investor home loan at a competitive rate.
Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.
Cover image source: fizkes/Shutterstock.com