Fixed Rate Home Loans

What are fixed rate home loans?

As the name suggests, fixed rate home loans are fixed on an interest rate for a certain period of time – generally up to 5 years. You’ll find most banks, credit unions, building societies, mortgage brokers and Australian lenders offer fixed rate loans.

What’s the difference between a fixed rate and variable rate home loan?

When you’re looking into different home loans, you’ll discover pretty quickly that you’ve got two main options to pick from: fixed rate and variable rate home loans. So what’s the difference?

Fixed rate home loans:

These home loans are reliable. You know exactly what your repayments are and your interest rate doesn't change for the period of your fixed rate term. Four key things to know about fixed rate home loans:

• The interest rate is fixed and will not fluctuate during the fixed period
• You know exactly what you have to pay each month/ fortnight
• They’re less flexible when it comes to making additional repayments, accessing funds or paying out the home loan early
• You may have to pay break costs if you “break” the terms of your fixed rate home loan agreement (e.g. by refinancing before the end of the fixed period).

Variable rate home loans:

Again, the name’s a bit of a giveaway. A variable rate home loan means that you repay your home-loan at a variable interest rate. So, the interest rate can keep changing, depending on what’s happening in the market. Three key things to know about variable rate home loans:

• Your interest rate can change, depending on what’s happening in the market
• The cost of your repayments can change each month/ fortnight
• You have more flexibility, so you are able to make extra repayments and pay off your loan earlier than planned if desired.

Is a fixed rate home loan suitable for me?

There isn’t a yes or no answer to this one. It really depends on your unique situation and also what’s happening in the market. But, if you like to plan ahead and want a certain level of stability, a fixed rate home loan might be suitable for you. For example, a fixed rate home loan could be great for a growing family who need to keep a close eye on their savings, or a first home buyer who’s dealing with the costs of renovations and moving.

Can I split my loan between fixed and variable interest rates?

It depends on your lender, but some lenders may allow you to split your loan between fixed and variable interest rates. This means you’d be able to assign a certain portion of the loan – say, 50% – to the fixed interest term, while leaving the rest variable. This may allow you to tap into some savings through the variable portion of the loan if the Reserve Bank of Australia (RBA) reduces the official cash rate and your lender follows suit with their interest rates.

What are some of the advantages of fixed rate home loans?

There are a number of possible advantages to fixed rate mortgages, including:

• Low interest rates: if you lock in at a low interest it could be a big win
• Feeling safe and sound: one of the best things about fixed home loans is when the interest rates are high or volatile you’ve got nothing to worry about
• A clear budget: you know the exact cost of your repayments, so you can budget for the future
• A chance to save money: if interest rates increase, you could be saving

What are some of the disadvantages of fixed rate home loans?

Some fixed rate home loans are locked in for 5 years. So you don’t want to work out half- way through that it was the wrong choice. Before signing up, make sure you consider some of the potential disadvantages:

• Lower interest rates: if the official cash rate decreases, your interest rate will remain the same. This can be a bit annoying, particularly if your neighbour is on a variable rate home loan and won’t stop bragging about the drop
  
• Moving house: if you want to move or sell your house, you may have to break your contract and pay a fee¹
• Restrictions on additional payments to your loan: when it comes to fixed rate home loans, some lenders won’t let you make extra repayments, or they might cap them at a certain amount/ charge a fee

If you choose to refinance before your fixed period ends, you may be subject to break costs. Get in touch with your lender to find out how much you’ll have to pay.

Helpful Tip: Purchasing a home is one of the biggest financial decisions you will ever make so it’s important to choose a home loan that suits your financial situation, preferences and most importantly, your financial goals. If you are someone that likes certainty and the ability to plan ahead, then you could benefit from the stability a fixed rate home loan provides. Fixed rate loans are great for helping you stick to a budget, however it is also important to be aware of any limitations or penalties, particularly around extra repayments and break fees. Canna Campbell, Financial Planner & Founder of SugarMamma TV

What is a “break fee”?

Banks don’t like it when you mess with your fixed rate contract. If you switch back to a variable rate, close your loan account, or make a larger loan repayment than normal, you may find yourself having to pay a fee to the bank. These fees are usually called “break fees”, but are also known as an economic cost or early repayment adjustment.

Can the interest rate change between application and settlement?

When you apply for a fixed interest rate, you’ll typically be offered a rate lock, which locks in that rate but can incur a rate lock fee. If you do employ the rate lock, your rate won’t change. However, your rate may vary between application and settlement if you don’t accept the rate lock.

What happens after my initial term finishes up?

When you sign on to a fixed rate home loan, you’re usually locked in at that interest rate for around 1 to 5 years. Once this term finishes up, you’ll have to either sign on to another fixed term contract or jump ship to a variable interest rate loan. The interest rate your loan reverts to after the initial contract period ends is also called the standard variable rate.

What are five things to consider when fixing a home loan interest rate?

1. Are you happy with the interest rate? Not just now, but will you be happy with it in the future? If something were to happen to your salary, would you be able to keep up repayments at the same interest rate? Make sure you’re entirely comfortable with your interest rate before locking it in.
   
   
2. Will you want to make extra repayments? Most lenders will have certain restrictions on additional repayments, whether they cap it at a certain amount or charge a fee. This is something worth looking into before you sign up.
   
   
3. Do you want to know your budget? If the answer is yes, then a fixed rate home loan could be a good way to go, as you’ll know the exact amount you have to pay each fortnight or month (depending on your term).
   
   
4. If you want to break the contract, do you have to pay a fee? You definitely want to check the T&C’s on this one, as some “break fees” can get pretty expensive. Break fees are generally higher the more interest rates have gone down since you took out your loan¹.
   
   
5. What does the revert to rate look like? The revert to rate is the interest rate a loan moves to after a fixed term. These rates are usually higher, so you may have to haggle your lender down to a more competitive rate or look to refinance with another lender for a more suitable rate.

What restrictions do fixed rate home loans typically have?

Before deciding on a fixed home loan, you should check with your lender if there are any restrictions. Some of these may include:

• Limits on making extra repayments: some providers allow you to make extra repayments so you can pay off your home loan quicker. But not everyone allows this, so it’s worth looking into before you sign up.
  
  
• Not being able to withdraw any additional payments you have made: some providers actually allow you to take back the extra repayments you’ve made. This is called a “redraw facility”. Not all home loans come with a redraw facility, so this is also something you might want to investigate before signing up.
  
  
• Not being able to link an offset account to your loan: Not sure what that is? Well, to put it simply, an offset account is a type of savings account which is directly linked to your home loan. The balance of your savings is deducted from your home loan, reducing your interest payments. Some lenders offer fixed rate loans with this feature, but this is less common.
  
  
• Having to pay a break fee: if you refinance, make extra repayments or sell your house you may have to pay a “break fee”.

How much should you fix?

This really depends on your unique situation. Some people fix their entire loan. This is quite common for property investors, as most of them don’t make extra repayments. Other people calculate how much they’ll pay off on their fixed home loan over the term, and then keep that portion of their loan variable to provide a level of flexibility. There’s not really a definitive answer to this one. It’s beneficial to look at your current situation and also consider what might happen in the future before making the decision.

How long should you fix for?

Typically, the longer you fix your loan, the higher the premium. Essentially, you’re paying for the security of a fixed interest rate. That’s why you want to make sure you’re fixed on a good one! It’s common to pick a 3 or 5 year fixed home loan rate, but you should really base this decision on your own situation.

How do I compare fixed rate home loans?

So, you’re on the hunt for a fixed rate home loan. What kinds of features should you look for?

• A low interest rate: obviously the lower the interest rate, the more money you’ll typically save, especially when it comes to a fixed rate home loan. Remember the rate you sign up to  is the rate you’ll have for the duration of the term
• Loan fees: are there any annual or ongoing fees you need to be aware of? Make sure you know exactly what you’re required to pay each month
• The fixed length: this is something you’ll need to decide on before signing up. How long do you want to hold your rate for - 1, 2, 3, 4, 5 years?

Compare fixed rate home loans with Lendi, an iSelect partner*

Finding a suitable home loan can be a bit of a daunting task. Especially when you know you might be locked into a contract for a few years. The best thing you can do is to research and compare a whole range of loan products. If you don’t want to do that bit by yourself, good news is iSelect has partnered with Lendi to do it for you! View your loan shortlist by hitting the button here, or give Lendi a call on 1300 186 260 (08:30-18:30).

Sources:
1. https://moneysmart.gov.au/home-loans/choosing-a-home-loan

Endorsed by:
Canna Campbell

Financial Planner and founder of SugarMamma TV

Canna is a qualified financial planner, the founder and director of SASS Financial Services, a boutique financial planning firm, and the founder of SugarMamma TV. She is Channel 9's exclusive 'money expert', and best-selling author of The $1000 Project & Mindful Money.

Learn more