5 Year Fixed Rate
How can I know which lender is offering the lowest 5 year fixed rate?
Unfortunately, no one publishes the lowest 5 year fixed rate in the market at any given time so it is not as easy to find one. If they did, all one had to do is look it up on a loan comparison site. This is something you would have to dig around to find out for yourself if you are considering taking out a 5 year fixed rate. Each lender considers a number of unique factors when setting their rates. For instance, there are discounts given for huge loan amounts. The percentage for these discounts varies from one lender to another. Now, few people know of the existence of these discounts because they are not advertised. There are also discounts for loans taken alongside professional packages, whose percentage varies from lender to lender.
Fixed rate loans attract a number of charges and fees which are not obvious from the start. It is wise to get the advice of mortgage consultants such as Home Loan Experts, who know the in-workings of a large number of lenders. They will help you understand how each lender’s policy works and find you the most affordable 5year fixed rate.
Can you have an offset account and pay extra off your 5 year fixed rate loan?
Some lenders offer this flexibility. Unfortunately, it is an option available with only a few lenders. Most 5 year fixed rate lenders do not allow clients to have an offset account. A good number of those that allow extra repayments limit them to a certain amount. Again, mortgage experts will help you find a lender who offers this.
Can I change my loan into a split loan?
No. The 5 year fixed rate cannot be changed into a combination or split loan where you pay a fixed rate in one half of the loan term and a variable rate in the other half. The fixed rate remains constant all through the fixed rate period. This will be clearly stipulated in the loan agreement.
Implications of locking in your rate
It is common for lenders to give you a different rate (usually higher) than the one quoted to you during your inquiry. Sadly, you have no way of knowing the actual rate they will give you because the rate is decided on the settlement day of your loan. So you get a quote for 6% and excited that the rates are bearable, you apply for the loan. However after the loan settlement, your statement reads a different rate, higher by 1% – 2%; and being a fixed rate agreement, there is nothing you can do about it.
This is a loophole lenders use to net in new customers. They know that application and loan settlement are weeks apart. So they quote the lowest rate for you, knowing full well they will give you a higher repayment rate. The excuse you will often hear is that the rates went up before settlement could be done and there was nothing they could do to revert to the old rates.
Because of the uncertainty of the rates, most lenders give you the option to lock in your rate, but at a fee. A few really good ones actually do it for free. How this works is that on the day you are applying for the loan, they give you the opportunity to lock in the day’s rate. Alternatively, they fill in the quote you were given in your quote if you prefer. Go for this option if the rate is lower. With a rate lock in place, the lender will not be able to twist the rate to a higher percentage and your loan repayments will be based on the quoted rate.
Rate lock policies differ from one lender to another. It is important to get an understanding of what each policy means before choosing your lender so as to know how this will affect your finances.
Is a 5 year fixed rate more cost effective than a variable rate loan?
You will save money. With a fixed rate loan, you already know how much it will cost you to repay the entire loan. You can actually work out your total instalments and know how much your repayment sum will add up to after 5 years. The greatest advantage of this kind of loan is that your minimum instalments remain level across the 5 years.
Compared to a variable rate loan, the fixed rate offers a high level of certainty, something you are never quite sure of with a variable. The interest rate over the first half of year one may be low then it suddenly increases in the second half of the year, pushing your instalments higher. What happens when you hadn’t budgeted for it? You run the risk of defaulting, which has its own consequences.
20 yeas ago, variable rates were a better choice because rates were taking a downward trend mainly because of the competition building up. Today, the opposite seems to be happening and with a fixed rate, you are protected against future increments.
Are there times when it is unwise to take a 5 year fixed rate loan?
Yes. If you are likely to opt out of the loan in the course of the loan term, it is best not to take it up in the first place. Exiting the loan in the initial years is especially costly as you have to pay termination fees which are often high. An honest evaluation is needed here.
Different lenders calculate the termination cost is calculated differently and what may be low for one lender could be high for another. Basically, if the prevailing variable rate in the market is higher than the fixed rate you’ve been paying, the break charges will be low. If on the other hand the variable rate is lower than your fixed rate, the higher your termination fee will be.
The fees charged are directly proportional to the difference between the fixed rate and the prevailing variable rate. The greater this difference is, the higher the cost will be for you. Whether low or high, you will lose money either way. The only way to avoid this is by not taking the loan.
Who qualifies for a 5 year fixed rate loan?
This option either as an investment loan or home loan is best left to people who have experience in investing and who have a solid back up that they can use to make repayments should their financial situation change.
It is also ideal for people who are sure that their financial situations will not be negatively affected over the course of the 5 year fixed period. People looking to buy a retirement home or family home which they intend to own for years to come will benefit from a 5 year fixed rate. Those looking to build investment property which they intend to run for a long period will find the 5 year fixed rate more economical.
If you are not sure whether your circumstances qualify you for a 5 year fixed rate, you should consult an expert who can assess the situation and give you the best option.
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