What is a reviewable fixed rate?
In a previous article, we have explained the advantages and disadvantages of the two main rates used for home loans: the fixed rate and the variable rate. There is a third option: the reviewable fixed rate. What is it and how does it work?
The reviewable fixed rate combines the flexibility of variable rate financing with the security of fixed rate financing.
The rate remains fixed for a pre-defined period and, at the end of the period, is subject to a revision. The pre-defined period can vary from one bank to another but is generally 3, 5 or 10 years. Upon expiry of each renewal period, you can decide whether to continue with a fixed or variable rate until the end of the next period and so on.
Let’s take the example of a 20-year contract with a review period of 5 years. At the end of the first 5-year period, you decide to keep a fixed rate for the second period. For the third period, you choose to change to a variable rate. For the fourth period, you go back to a fixed rate.
What are the advantages?
- You are protected in the event of rate increases during your chosen fixed rate period (3, 5 or 10 years).
- You have the flexibility to choose the rate you want: upon expiry of each renewal period, you can either opt for a new fixed rate or change to a variable rate for the next period. This allows you to take maximum advantage of market opportunities. If the rates tend to decrease and if you have a fixed rate at the end of the renewal period, you can change to a variable rate, and vice versa.
- You have the freedom to choose without paying additional charges. You can change the type of rate for each renewal period or you can repay your loan (fully or in part) without early repayment charges upon expiry of each renewal period.
What are the disadvantages?
- Depending on the chosen renewal period (3, 5 or 10 years), the reviewable fixed rate can be higher than the variable and the fixed rates.
- The reviewable fixed rate represents a risk, even if this risk is more limited than the variable rate. The rate, whatever the type chosen at the end of each renewal period, can be higher than expected. Let’s take again the example of the 20-year reviewable fixed rate with a review period of 5 years. Nothing indicates that in 5, 10 or 15 years, the rates, fixed or variable, will remain as low as today.
- The reviewable fixed rate is a tailored contract, more complex than the two other rates. That's why you don’t have to be afraid to ask questions to your banker before signing this type of contract.
Often you hear people say: “Anyway, until I have paid off my home loan it’s the bank who owns my house”. But is it true?
It is always the same question that every one of us is asking before signing a home loan with his bank. To gain a more objective overview, let’s analyse them one by one with their respective advantages and disadvantages.
The rate remains fixed for a pre-defined period and, at the end of the period, is subject to a revision. The pre-defined period can vary from one bank to another but is generally 3, 5 or 10 years.