What is a fixed rate home loan?
In the Australian property landscape, you might have heard of these home loan types: Fixed rate mortgage, variable rate mortgage and a split loan.
A fixed rate home loan has an interest rate that remains the same during the fixed rate period. At the end of the fixed term, you can choose to roll to a variable rate loan for the remainder of your loan term, or to re-fix your loan for a new fixed term (at new offered rates).
When you have a fixed interest rate, your repayments will stay the same during the fixed term. This could be helpful for those who want to keep better track of their regular repayments or plan their finances months in advance. A fixed rate also lets you know the full interest cost for the entirety of the home loan of the fixed term.
If you want to know more about fixed rate home loans, this article gives you a comprehensive overview of what to expect.
Understanding fixed rate mortgages
When you take out a fixed rate mortgage, your lender is guaranteeing that your interest rate will remain unchanged for the agreed period, typically one to five years. This is irrespective of whether interest rates in the market or with your lender go up or down. A lot of borrowers opt for a fixed rate mortgage to lock in low interest rates and minimise loan costs.
During a fixed rate period, you have agreed to that fixed rate with your lender. If you were to break that agreement, you would likely incur break costs. Break costs are incurred when you repay your loan early (ie, due to a refinance or property sale, or paying out the loan with your own funds), make additional repayments to your loan over the allowable limit, or switch your product, interest rate or payment type during the fixed rate period. Break costs represent the lender’s loss due to the fixed rate loan being repaid early.
Once the fixed rate period expires, your home loan will generally become a variable rate loan (a type of loan where the interest rate can fluctuate over the life of the loan). Before your fixed rate term ends, it could be a good idea to contact your lender to discuss your options, and check if you want to remain variable after the fixed term expires, or if you want to re-fix your loan for a new fixed loan at the current fixed rates your lender is offering.
With fixed rate home loans, loan features may be limited. Additional loan repayments, offset sub-accounts, and the ability to redraw are often not allowed (and if they are, they may come with a fee).
Take note that different lenders offer different features. Some fixed rate mortgages may come with various repayment schemes and features that others may not provide.
Benefits of a fixed rate home loan
Fixed rate home loans offer unique benefits. Below are reasons why borrowers choose fixed rate mortgages:
Certainty of repayments
With a fixed rate home loan, you’ll know exactly how much you need to pay weekly, fortnightly, or monthly. Budgeting becomes simpler, making it easier to plan your finances accordingly. You’ll also have a better idea of how much interest you’re paying over the fixed term.
Unaffected by rate hikes
If interest rates suddenly go up, you won’t be affected because you’re locked in a fixed rate. You won’t have to worry about rising repayment amounts.
Lock in a low interest rate
With a fixed rate home loan, you can take full advantage of low interest rates. By locking in low rates, you’ll be saving more over the life of the loan.
The primary benefit of taking out a fixed-rate home loan is the greater sense of financial certainty it provides. Before taking out a fixed rate mortgage, make sure it fits your situation.
Drawbacks of a fixed rate home loan
The certainty of a fixed home loan allows you to set an accurate budget. However, the inflexible nature of a fixed home loan can be both a blessing and a curse. Consider these disadvantages when taking out a fixed rate home loan:
No benefit from rate cuts
If interest rates go down, you can miss out on any savings. Even small changes in the interest rate can greatly impact the cost of your loan and repayment amount.
Fixed rate loans typically have restricted features
Usually, fixed rate home loans don’t include or allow offset sub-accounts or redraw facilities, which are loan features used to help reduce the amount of interest you pay.
Refinancing or repaying your mortgage early could be expensive
There will be fees charged if you move to refinance your loan to a lower rate or make additional payments. Moving to end your fixed rate term early will likely attract significant break fees.
The fixed term eventually ends
When your loan reverts to the standard variable rate at the end of the fixed term, your interest rate (and subsequently your minimum repayment) may increase.
The biggest downside to your rate being locked in for a length of time occurs when interest rates are dropping around you. Always keep these disadvantages in mind when deciding what kind of mortgage to apply for.
What’s the difference between a fixed rate and variable rate?
A variable rate home loan’s interest rate changes over the life of the loan. Your repayments will increase or decrease depending on the interest rates. This means the price of a variable interest rate loan will change throughout the life of the loan. External factors such as lenders’ funding costs, the Reserve Bank’s official cash rate and the state of the economy can affect your home loan’s rates.
Here’s a quick comparison of fixed rate and variable rate home loans:
| Fixed Rate Home Loan | Variable Rate Home Loan | |
|---|---|---|
| Interest Rate | The same rate for a fixed period. | Potentially fluctuating interest rate depending on market factors. |
| Repayments | The same repayment amount for a fixed period. | Possibility of changing repayment amounts depending on the interest rate. |
| Loan Term | The fixed rate period can be anywhere from one to five years. After the fixed period, it will turn into a variable loan. The entirety of the loan term is typically around 25 to 30 years. | The typical variable rate home loan term is around 25 to 30 years. |
| Features | Usually has limited features and less flexibility. | Usually has more features available, such as redraw facilities and offset sub-accounts. |
Is a fixed rate home loan a good choice?
It depends on what you want out of your home loan. If you’re looking for stability and predictable payments, a fixed rate mortgage could be a better fit. However, always understand the potential pitfalls that are associated with this type of loan so you can make an informed decision.
Alternatives to a fixed rate and variable rate home loans
If you don’t think a fixed rate or variable rate home loan fits your needs, a split loan could be a good alternative. A split home loan is a combination of fixed and variable rate mortgages.
With this, you’re dividing your home loan into a fixed rate account and a variable rate account. For example, a 70:30 split would see 70% of your loan charged at the lender's standard variable rate, with the other 30% being charged at a fixed rate for a span of one to three years. You can change the split loan ratio to whatever you see fit.
Want to learn more about fixed rate home loans?
Discuss your home loan needs with one of our friendly lending specialists! At loans.com.au, we offer a range of fixed rate home loans for you to choose from. If you’re ready to start your home loan journey, apply online today!
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
