Applying for a home loan may be one of the most important financial decisions you make, so it’s worth getting to know the different types of home loans out there before you commit to one.
Here’s a guide to three-year fixed rate home loans to help you decide if this type of loan is right for you.
What is a three-year fixed rate home loan?
A three-year fixed rate home loan allows you to lock in an interest rate for a three-year period before your initial rate expires and reverts back to a variable interest rate. During this time, your interest rate will stay the same even if market interest rates rise or fall.
These types of home loans can be an appealing option for people who want to be sure of their mortgage repayments for a period of time and get used to budgeting for repayments.
You can also opt to fix your interest rate for one, two, four or five years, so it’s important to compare all your options against your financial situation to find one that works for you.
What happens at the end of three-year fixed rate home loans?
Once the initial three-year period expires, you will usually be offered the opportunity to refix another interest rate or revert to a variable rate.
Please note that if you accept a new three-year term, it’s likely to be at a different interest rate (either higher or lower). If you choose to revert to a variable rate, your interest rate and mortgage payments are also subject to change.
Pros of three-year fixed rate home loans
There are a number of potential benefits to choosing a three-year fixed rate home loan, including the following:
- Easier to budget – Because you know how much interest you’ll be paying over a set period of time, you can budget and set financial goals accordingly. This could be especially beneficial for new homebuyers who also have to pay for other initial expenses like renovations.
- You won’t be affected by rate rises – Your interest rate is fixed for three years, meaning you can’t be impacted by increases in standard interest rates.
- Set regular repayments – You’ll know how much you have to pay each week, fortnight or month and can schedule payments accordingly.
Cons of three-year fixed rate home loans
On the other hand, there are also some possible drawbacks to choosing a three-year fixed rate home loan, such as:
- Interest rate decreases won’t apply to your loan – You can’t benefit from a general decline in interest rates during your fixed interest period.
- You may not be able to make extra repayments – Additional loan repayments typically aren’t offered with fixed rate loans.
- You may not be able to redraw – Not having a redraw facility means you can’t access any extra money you’ve deposited into your home loan.
- You may be subject to break fees – If you choose to break your agreement for the fixed interest period it’s likely you’ll have pay a fee – and it could be significant.
Factors to consider when applying for a home loan
Selecting and applying for a home loan isn’t just about deciding between a fixed rate or variable interest rate. Here are some of the other factors to take into consideration:
Aside from choosing between a fixed rate or variable rate, you should also look at a lender’s initial rate offering and how it shapes up against other lenders in the market.
Some lenders also offer split home loans, which means part of your home loan is variable and part of it is fixed. This could allow you to take advantage of some of the some of the benefits of both types of loans.
There are numerous fees associated with taking out a home loan and they can add up over time. Some of the most common fees to look out for include:
- Application fees
- Annual fees
- Account-keeping fees
- Legal & settlement fees
- Settlement fees
- Exit fees
- Break fees (for fixed interest home loans)
Also keep in mind that some lenders offer to waive fees if you meet certain conditions.
Different lenders have different stipulations for making home loan repayments. For example, if you have a three-year fixed rate home loan, or any fixed loan, you may not be able to pay any extra than the minimum repayments during the fixed rate period.
It’s important to choose a loan that offers you a reasonable balance of stability and flexibility in making repayments over time.
Some home loans are relatively basic, while others offer a suite of features. Consider other possible features such as:
- An offset account – This is a transaction account that is linked to your home loan. The balance of your account is ‘offset’ against your loan balance, meaning your lender attributes those extra savings towards your loan – so you pay less in interest.
- The option to redraw – A redraw facility allows you to borrow back extra money you've already repaid.
- Incentives – Some lenders offer additional incentives for home loans such as the ability to earn frequent flyer points or being offered a free holiday.
Choosing an appropriate home loan comes down to conducting some independent research and comparing home loans in relation to your financial circumstances. Also consider seeking professional advice by speaking with a financial adviser.