Fixed rate home loans are gaining popularity, but the number of lenders offering 10 year fixed products is narrow - find out who offers them.
The popularity of the fixed rate home loan has grown, with borrowers favouring payment certainty, and banks offering sharp pricing.
According to ABS lending data, fixed rate loans made up just 13% of new home loan lending in March 2020. Fast forward to June 2021, and this figure is now 46%.
However, fixed rate loans for terms as long as 10 years are rare for a variety of reasons. With that said, there are a number of lenders offering lengthy fixed loan terms.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
Which lenders offer 10 year fixed home loans?
There are decidedly few lenders offering ten-year fixed home loans on the Australian market. So far, Savings.com.au’s market research had identified two at the time of writing:
A number of other lenders used to offer them, including other big four banks, but historically low interest rates have made them unpopular with borrowers and lenders.
Why are 10 year fixed home loans hard to find?
As you might be aware, variable loans have traditionally been the home loan of choice in Australia. Until recently, even two to three year fixed loans were relatively unpopular, but have since gained market share. Still, anything longer than a five year fixed term is pretty rare in Australia. But why?
If you know anything about the United States' financial market, you’ll see that 10-30 year fixed home loans are the preferred option, and 'variable' or 'adjustable' rate mortgages are often talked about as the devil.
Contributing editor of Rolling Stone magazine and author of Griftopia, Matt Taibbi - who also covered the Global Financial Crisis in great length - had this to say about variable rates in the US:
"Some Americans were similarly beaten and re-beaten in the mortgage con, up to three times. Some were induced to buy exotic … variable-rate mortgages, then their pension funds invested in mortgage securities, and then, when the markets all went belly up, their tax dollars went to ‘save the economy', which in practice often meant buying up toxic mortgages at cost from guilty banks." - Matt Taibbi, via Substack newsletter.
The popularity of variable rates in Australia is because, in very simple terms, our banks' wholesale borrowing structures are different.
In the United States, banks typically source funds on the 10-30 year bond market, while in Australia, banks are much more short term in their borrowing. Essentially, Australia's debt market hasn't quite evolved enough to allow local lenders to sell bundles of longer-term fixed-rate loans to bond investors, so the lenders face being stuck with long-term fixed-rate loans on the balance sheet, which is quite unappealing.
This doesn’t stop borrowers' home loans in the United States changing lenders' hands multiple times, but the source of origination remains the same. Because of how banks borrow money, this makes 10-30 year rates in the US relatively affordable, compared to what would be seen in Australia, where short-term fixed and variable rates reign supreme.
Pros and cons of a 10 year fixed home loan
There are a few pros and cons with 10-year fixed loans.
Repayment certainty: The fortnightly or monthly repayment won’t change for 10 years. This provides certainty, rather than having to worry about what’s happening in the market.
Lock-in at bottom of rate cycle: Over the past few years rates have hit rock bottom, so the argument could be ‘They can only go up, right?’
Weather any rate rises: Any rate rises as economic conditions improve trigger a flurry of refinancing activity and potential worry among other borrowers. A few basis points' difference could add hundreds to your repayment every month. You wouldn’t have to worry about that.
‘Set and forget’: Depending on how financially savvy you are, it can be easy to watch market movements like a hawk. With a 10 year loan, you can ‘set and forget’, which is potentially a load off the shoulders for some.
Much higher interest rates: At the time of writing, interest rates on 10-year loans were up to triple the amount seen on discounted one-year fixed rates.
A $400,000 home loan 30 year loan with a variable rate of 2.09% p.a. could have a monthly repayment of $1,497, but at a typical 10-year fixed rate of 7.49% p.a. this monthly repayment could be a massive $2,794.
Potentially big break fees: If you exit a fixed loan early, you’ll typically incur break costs. Depending on your loan size and how much you have left on your loan term, this could work out to be many thousands of dollars.
Fewer lenders = less competition: Across the wider market there is a lot of competition with upwards of 100 lenders vying for your attention. Market saturation stokes competition. With just two lenders, as per our market research, offering 10 year loans, there is much less competition.
More loan restrictions:
Repayments: Fixed loans typically carry additional restrictions as to how much you extra you can repay into the loan. If you’re planning on paying off your loan early, a 10 year fixed option may not be for you.
Deposit: Some - not all - 10 year fixed loans require larger deposits. This is a problem if you’re looking at getting into the market sooner with say a 5% deposit.
Do you really know more than a lender? A fixed loan is essentially a small bet between borrower and lender. You lock in a rate because you think rates will go up, but do you really know more than a bank with its many economists? A lot of thought goes into the interest rates, and chances are they’re going to come out on top regardless of what the market does.
Photo by Steven Ungermann on Unsplash