Fixed Rate Loans

Posted on May 2, 2009
Filed Under Fixed Rate Loans, Loans Features |

 

A Fixed Rate Loan refers to the fixing or securing of an interest rate at a set amount for a ‘set period of time’. The interest rate is contracted to remain unchanged during the term of the fixed rate, no matter what movements are occurring in the market place. Traditionally lenders have offered terms of between 1 – 5 years for fixed rates, however recently some Lending Institutions have offered terms of up to 10 years.

Fixed Rate term loans normally require the loan to be renegotiated at the conclusion of the Fixed Rate term, thus a 5 year fixed term loan would normally be required to be repaid in full at the end of year 5. However most Lending Institutions have the ability to arrange for the facility to revert to the Standard Variable Rate after the Fixed Rate term has expired. Thus a loan facility can be established for a 25 or 30 year loan term with the first 5 years, fixed at a specific interest rate. These types of facilities are popular within the first homebuyer market as they guarantee that the loan repayment will be the same for the Fixed Rate period.

Many property investors have also found the Fixed Rate loans attractive products due to the product offering the comfort of guaranteed repayments.

Borrowers who wish to utilise one of these facilities should be warned that they are committing to a contract with the lending institution, that they will continue the facility for the prescribed term. Should this contract be required to be broken or the term changed, the lending institution may require the borrower to cover its costs involved in the breaking of the contract. These are commonly known as ‘break costs’ and can be very expensive. The break costs are determined by many factors; such as the term remaining, the current interest rate environment and the amount of the outstanding balance.

In addition to the prohibitive cost is breaking the contract terms, many Lending Institutions will also restrict, how much can be repaid of the loan facility during the Fixed Rate term. This may vary from a few thousand per year to a percentage of the initial loan amount over the Fixed Rate term. These products offer guaranteed repayments for a period of time, but they also offer very little in flexibility. You should be made aware of these costs, prior to committing to any Fixed Rate product. 

 

 

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