The quickest way to understand Fixed Rate Loans

Understanding Fixed Rate Loans as a First Home Buyer

When you're buying your first home, one of the biggest decisions you'll face is choosing between a fixed interest rate and a variable interest rate. For many first home buyers across Carnegie and Australia, a fixed rate home loan offers certainty and peace of mind - you'll know exactly what your repayments will be for the fixed period.

But here's where it gets tricky: what happens when you want to make extra repayments on your fixed rate loan? This is a question we get asked all the time at Plavin Finance, and it's an important one to understand before you apply for a home loan.

What Is a Fixed Interest Rate?

A fixed interest rate means your home loan's interest rate stays the same for a set period, typically between one and five years. During this time, your repayments won't change, regardless of what happens in the broader market. This can be particularly helpful for first home buyers who are working with a tight first home buyer budget and need to plan their finances carefully.

The alternative is a variable interest rate, which can move up or down based on market conditions and lender decisions. While variable rates offer more flexibility, they also mean your repayments can change.

The Extra Repayments Question

Here's the catch with fixed rate loans: most lenders limit how much extra you can pay off your loan during the fixed period. These limits typically range from $10,000 to $30,000 per year, depending on your lender and loan product.

Why do lenders do this? When they offer you a fixed rate, they're essentially locking in their returns for that period. If you pay off large chunks of your loan early, it affects their calculations and potential income.

What happens if you exceed the limit?

• You'll usually be charged break costs or early repayment fees
• These fees can be substantial, sometimes running into thousands of dollars
• The exact amount depends on how much you've overpaid and current market rates

Making Extra Repayments Work for You

Despite the restrictions, there are still ways to get ahead on your first home loan while on a fixed rate:

1. Stay within the annual limit: Most lenders allow $10,000-$30,000 in extra repayments per year without penalties. Use this to your advantage.

2. Consider a split loan: You could fix part of your loan and keep part on a variable rate. This gives you the security of fixed repayments while maintaining flexibility to make unlimited extra repayments on the variable portion.

3. Use an offset account: Some fixed rate loans come with an offset account. While less common than with variable loans, money in your offset account reduces the interest you pay without technically counting as an extra repayment.

4. Save for the end of the fixed term: If you're likely to receive bonuses or have irregular income, consider saving these amounts in a high-interest savings account until your fixed period ends, then make a lump sum payment.

First Home Buyer Considerations

When you're going through your first home loan application, there's a lot to consider beyond just the interest rate. Here are some key factors for first home buyers:

Home Loan Options

As a first home buyer, you'll have access to various home loan options including:

• Low deposit options with as little as a 5% deposit or 10% deposit
• The First Home Loan Deposit Scheme, which helps you avoid Lenders Mortgage Insurance (LMI) with deposits as low as 5%
• Regional First Home Buyer Guarantee for those purchasing in regional areas
• The ability to use a gift deposit from family members

First Home Buyer Grants and Concessions

Depending on where you're buying, you might be eligible for:

• First home owner grants (FHOG)
• First home buyer stamp duty concessions, which can save you thousands
• First home super saver scheme, allowing you to save through your superannuation

These benefits can significantly impact your first home buyer budget and overall affordability.

Creating Your First Home Buyer Checklist

Before you start your first home buyer journey, make sure you've covered these bases:

1. Check your first home buyer eligibility for grants and schemes
2. Understand your borrowing capacity
3. Save your deposit (remember, 5% or 10% deposit options are available)
4. Get your finances in order and gather required documentation
5. Obtain pre-approval to know your budget before house hunting
6. Decide between fixed, variable, or split rate options
7. Understand the features you need, like redraw facilities or offset accounts

Fixed vs Variable: Making the Choice

There's no one-size-fits-all answer when choosing between fixed and variable rates. Consider:

Fixed Rate Benefits:

• Certainty in your repayments
• Protection if interest rates rise
• Easier budgeting for first home buyers
• Potential interest rate discounts during the fixed period

Fixed Rate Limitations:

• Restrictions on extra repayments
• Potential break costs if you need to change your loan
• Less access to features like offset accounts
• You won't benefit if rates fall

Variable Rate Benefits:

• Unlimited extra repayments
• More features, including offset accounts and redraw facilities
• Flexibility to refinance without break costs
• Benefit from rate decreases

Working with a Mortgage Broker

When you're ready to apply for a home loan, working with a mortgage broker in Carnegie can help you understand all your options. At Plavin Finance, we help first home buyers compare different lenders, access exclusive interest rate discounts, and find loan products that match their specific needs.

We can guide you through the entire home loan application process, from initial discussions about your first home buyer budget through to settlement. We'll also help you understand the fine print around extra repayments, break costs, and other features that matter to you.

Getting Started

Buying your first home is an exciting milestone, and understanding how fixed rate loans work with extra repayments is just one piece of the puzzle. The key is finding a loan structure that gives you the right balance of certainty and flexibility for your circumstances.

Remember, your first home loan doesn't have to be your forever loan. As your situation changes, you can always consider refinancing to a product that better suits your needs.

Ready to take the next step in your first home buying journey? Call one of our team or book an appointment at a time that works for you. We'll help you navigate your home loan options and find a solution that fits your goals.