What is a fixed rate home loan?
A fixed rate home loan is a loan with the option to lock in or ‘fix’ your interest rate for a set period of time - typically between one and five years. However home loans with fixed periods as long as 10 years are available.
During that set period, the interest rate will not change as it is fixed. This lies in contrast with variable rate home loans, which can ebb and flow as variable rates can be more acutely influenced by the Reserve Bank of Australia’s (RBA) cash rate, the Australian economy, and the home loan lender setting their own interest rates.
Even though fixed interest rates remain constant during their fixed rate term, banks and mortgage lenders regularly reassess their home loan interest rates, including fixed rates for new customers. Between application and settlement, it’s possible for a fixed home loan product to increase its interest rate, prompting many to wonder whether ‘rate locking’ is a viable avenue.
How do I compare fixed rate home loans?
Knowing the fees will give you a better understanding of the fixed-rate loan’s 'true' cost. A mortgage repayment calculator can also help you with this.
When narrowing down your options for a fixed rate home loan, it’s important to consider other costs and fees such as upfront or application fees, ongoing fees like annual package fees, and any break costs.
Comparison rates take into consideration upfront and ongoing fees associated with the home loan, plus the revert rate that applies after the fixed period ends. If the comparison rate is significantly higher than the advertised rate, it’s an indicator that fees are high or the revert rate is high.
Understanding how fees can impact your home loan decision, provides a more accurate picture of the 'true' cost of the fixed rate loan. To help you navigate the fixed home loan market and determine the true cost of a fixed rate home loan, check a mortgage repayment calculator
Pros and cons of fixed rate home loans
The key advantage of a fixed rate loan is repayment certainty. By knowing exactly what your repayments will be, you’ll be able to budget for the future without having to factor in rate hikes or market volatility.
With a fixed rate loan, interest rate rises won’t affect the amount of interest you will have to pay on your home loan for that given period.
If interest rates fall, this may result in you missing out on potentially lower mortgage repayments from a rate cut. As a result, fixed rate mortgages may be more limited in their flexibility.
Variable rate home loans generally come with access to more home loan features, such as an offset account or a redraw facility, plus in some cases unlimited extra repayments. If you’re looking to get ahead on your mortgage, a variable product may offer more suitability.
Further if you want to refinance your home loan and you've fixed your interest rate, you may have to pay break costs for ending the fixed rate period early. Depending on your circumstances this could add up to thousands of dollars.
Is now the right time to fix my home loan?
If there’s talk of mortgage rates increasing, borrowers may wonder about locking in a fixed rate now to weather the storm of any RBA cash rate rises. The problem with this is lenders are usually pretty ahead of the curve when it comes to future interest rates and will usually increase fixed interest rates well before the RBA makes its move.
If a fixed rate is considerably higher than the variable rates on offer, you’ll need to consider whether it’s worth it. Ask yourself if there’s a chance variable rates could rise higher than the fixed rate over the fixed term. Regardless, if you value stability and certainty, it could be beneficial to fix your home loan to assure guaranteed repayments and provide consistency in your personal budget.
Why choose a fixed-rate home loan?
A fixed interest rate, as the name might suggest, fixes the interest rate you pay in place for the duration of the term specified. For example, a three-year fixed interest rate at 2.50% p.a. will stay at that 2.50% p.a. rate for three years regardless of economic pressures or the lender’s needs, before reverting to a standard variable rate.
Cash flow certainty is arguably the biggest advantage of a fixed-rate loan. Your repayments staying the same for a known period of time can make it much easier to budget, as you know exactly how much your repayments will be. This often makes fixed-rate home loans popular for investors and first-time buyers over the first two-three years that they own a property for.
Of course, this can also be a disadvantage if interest rates drop. The locked nature of a fixed-rate home loan means any reductions in a lender’s interest rates for any reason (such as recent changes to the cash rate) won’t be passed on to you, which can cause you to pay hundreds if not thousands of dollars more in interest. Also the variable rate the loan will revert to at the end of the fixed-rate period (known as the revert rate) can be significantly higher than some of the lower variable rates on offer, so you may want to consider refinancing to a different loan around this time.
Can you break a fixed-rate home loan early?
The simple answer is, yes you can, but it doesn’t come without some hefty penalties.
Ending your fixed-rate loan before the term is up essentially means ‘breaking’ the terms and conditions you set within your contract with the lender. For instance, this could include switching to another lender or product, making repayments that exceed the specified amount stated in the contract, closing the loan, or repaying the loan earlier than expected.
In any of these situations, you are breaching the fixed-rate home loan and are thus liable to pay certain fees to the lender.
If your lender incurs a loss, they will pass the cost onto you typically in the form of a break fee or early exit fee depending on the terminology they use.
Check with your lender regarding the breakdown of their fees for exiting a fixed-rate home loan early.
Frequently Asked Questions
Most lenders will offer the ability to have both fixed and variable rates through a ‘split’ loan option. With a split rate home loan, you essentially split your home loan balance into two different accounts, at different portions – one being charged a fixed interest rate and one charged a variable rate. In a low interest rate environment, having more of your loan as a variable-rate means you could potentially reap the rewards of falling interest rates and repayment flexibility, while fixing a greater portion of the loan could be more beneficial if interest rates were to rise.