With the infinite variety of home loans available it’s possible to secure a loan that offers you the security of fixed interest rates, so you always know how much your monthly repayment will be, as well as the flexibility to make extra repayments that help you move more quickly towards paying off your loan. This helps you stick to a budget and also encourages you to take advantage of any change in circumstances that may free up additional income.
How do fixed rate home loans that allow additional repayments work?
Fixed rate home loans that allow additional repayments are very much like standard fixed rate loans. The factor that makes them different is that they allow extra repayments to be made. Often the lender will set a limit to the amount of additional payments that can be made before a charge will be incurred. The same may be true should you repay the fixed rate loan in full too early, so it’s worth taking the time to fully understand the terms that apply to the loan, including any restrictions and fees.
What are the main features?
There are three features you should pay attention to when searching for a fixed rate home loan that allows additional payments. These are:
- Fees – you will want to keep these as low as possible so check whether extra fees apply when you make additional repayments or use other features of the loan. Some fees may be one off and others ongoing so make sure you know what will apply and when.
- Fixed terms – you should be able to source a loan with a term that works for you and your personal circumstances. This could be anything between one and five years, so shop around until you locate a suitable product that will allow you to secure your loan for the period of time you want.
- Interest rates – just as you want to keep fees to a minimum so should you look for the most advantageous interest rates, particularly if you opt for a five-year locked in fixed rate.
What are the risks and rewards?
The fixed interest rate on the home loan will help you to budget precisely for the initial period of the loan. This is ideal if, for example, you are a first time homebuyer. The chance to make additional repayments can help you to reduce the cost of your loan, and also help you to repay the loan back quicker. If you are able to find a good, competitive fixed rate that you are eligible for you can be locked in to that rate for up to five years. This allows you to take advantage of a healthy period of protection against interest rate rises.
Remember that with some loans the amount of additional repayments that you can make may be limited. Fees may also be charged for extra repayments, or if you pay your loan back earlier than the set fixed term. Although a fixed rate can be beneficial, if the Reserve Bank of Australia cuts interest rates you might turn out to be paying interest at a higher level than the standard variable loans.