Fixed Rate Mortgage - Home Loan Basics

When you contract a mortgage with a lender or a mortgage broker, you are starting a relationship which could last much longer than many of the relationships you enjoy in your personal life. A fixed rate loan is one of the nine basic types of loans and serves to lock three things into place:

* The mortgage rate or interest rate;
* The repayment amounts; and,
* The size of the loan.

Fixed rate loans are, in actual fact, hybrids. By this is meant that the mortgage rate is fixed for one to five years and then automatically converts into a standard variable rate loan thereafter. As you can see, the lock on the interest rate is not quite so absolute. The period of one to five years is the most common. Some lenders do offer 7-, 10-, and 15-year fixed rate periods, although these are few and far in between.

The greatest advantage of a fixed rate mortgage is that you are protected in the event of interest rate hikes. Your payments for the duration of the fixed rate period, from the first to the last day, will be level, so you’ll know exactly how much to budget for in order to meet your commitments.

However, that can also be a disadvantage: in a period of decreasing interest rates, you are contractually bound to continue paying the fixed rate mortgage. If you are stuck with a fixed rate, you will suffer knowing you could be paying lower instalments on a variable rate loan. (You can actually do something about this, but that is the essence of the fixed rate loan relationship.)

You may face penalties (called break costs or exit fees) if you decide to settle the balance before expiry of the term. Whilst you may consider this inequitable as the bank recovers its money first, bear in mind that these break costs are usually only payable if market interest rates fall during the term of the fixed rate loan. The penalty is based on the concept that, when interest rates have fallen, the bank or lender will lose money by letting you repay the loan early and then having to lend it out to another customer at the new lower mortgage rate.*

There is no standard way employed by lenders to calculate the break costs on a fixed rate loan. It could be a mix of flat fees and percentages on the amounts paid earlier than scheduled. If the prevailing fixed rate mortgage is higher than the mortgage rate you are paying, you may find some banks compensating you for earlier settlement of the loan.

*If your fixed rate loan is a mortgage accelerator, different conditions may apply. Check with your mortgage broker or bank.

Mortgage Related Resources

* Aussie Home Loans - Request a free mortgage broker apointment
* Fast, Simple & Free Home Loan Comparison Report

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