A fixed-rate home loan simply means that the interest rate remains the same throughout the fixed rate term of the loan.
This is an alternative to a variable rate home loan which is when the lender can change the interest rate in line with market conditions and the cash rate set by the Reserve Bank of Australia (RBA).
When you begin comparing options for your home loan, you’ll find some come with different features. There are various repayment types and other options such as an offset sub-account.
The interest rate is important because it plays a huge role in determining the size of your regular repayments and the total mortgage amount you will repay over the life of the loan.
At loans.com.au, we let our borrowers choose what type of loan they want, whether it be fixed, variable or split, and what features they’d like to add.
As the name suggests, a fixed rate mortgage means that your interest rate will remain locked in ('fixed') for a set period of time. Additionally, with a fixed rate mortgage, you are likely to pay the same amount every repayment whether it’s weekly, fortnightly, or monthly.
When you take out a fixed rate mortgage, your lender is guaranteeing that your interest rate will remain unchanged for the agreed time period, irrespective of whether interest rates go up or down.
Typically, the longer a fixed rate home loan term, the higher the interest rate will be as you’re paying for the security of a fixed interest rate for longer.
Bear in mind that the fixed rate period will expire after an agreed period, usually between one and five years. Once the fixed-rate term ends, your mortgage will go back to a variable rate (the interest rate can fluctuate over the life of your loan). When your fixed rate term expires, it may be a good idea to contact your lender to discuss your options. You may wish to consider re-fixing on a new rate and term, or simply remain variable.
During a fixed rate period, you are essentially in a contract with your lender. If you were to break the contract, you will likely incur break costs. Break costs are incurred when you repay your loan early or switch your product, interest rate or payment type during the fixed rate period.
It’s also important to note that additional loan repayments, offset-sub accounts, and the ability to redraw are often not allowed with fixed rate loans (if allowed, you may have to pay a fee). If you’re considering a fixed rate, take into account the break costs and whether you’re after any specific loan features.
It is also possible to have a split home loan, which is a combination of fixed and variable.
At different portions, you split your home loan balance into two accounts, one being charged a fixed and one a variable rate.
For example, a 70:30 split, would see 70% of your loan charged at the lenders standard variable rate, with the other 30% being charged at a fixed rate for a span of one to five years.
While fixed rates can be helpful in terms of budgeting, they often don’t have as many features available that variable loans have.
Below are the pros and cons of fixed interest rates to give you a better idea whether it’s right for you.
Advantages
- Certainty of repayments - fixing your home loan interest rate means you know exactly how much you will need to pay every week, fortnight, or month
- Makes budgeting a lot easier - you can plan your finances ahead of time and manage your cash flow
- Rate rises won’t impact you - if interest rates rise during your fixed period, they won’t be passed on to you which means you could save money on repayments in the future
Disadvantages
- Rate cuts - if the interest rate goes down, you can miss out on any savings. Even small changes in the interest rate can greatly impact your repayment amount
- Restricted features - fixed rate home loans usually don’t include offset sub-accounts or redraw facilities, which are used to help reduce the amount of interest you pay
- It may be costly to change your loan - there will be fees charged if you move to refinance your loan to a lower rate or make additional repayments. The fees can also be very expensive, often to the tune of thousands of dollars, if you move to end your fixed rate term early
- The fixed term will eventually end - When the fixed term finishes, your loan will revert to the standard variable rate. If the standard variable rate has increased since you first signed up to your fixed term, you need to prepare and ensure you can afford the loan repayments on the variable rate
If you're ready to lock in a low fixed rate home loan, chat to one of our friendly lending specialists today.
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