Fixed rate home loans explained
Fixed rate home loans explained
Learn everything you need to know about fixed rate home loans with Selling Houses Australia host, Andrew Winter.
Video Transcript
Hi, I’m Andrew Winter, host of Selling Houses Australia.
With years of property market experience under my belt I know for a fact that stability can
be invaluable when it’s needed.
And if you’re looking for a bit of stability and security when it comes to your home loan,
then a fixed rate home loan could be just the ticket.
A fixed rate loan is, well, a home loan with a fixed rate.
But what that means is that while you are on a fixed rate home loan, your interest rate
won’t change by even a fraction of a percent.
This is absolutely perfect for anyone who wants their home loan repayments to stay where they are.
They won’t go up, they won’t go down, your home loan repayments will stay the exact
same until your fixed rate period ends.
Now a fixed rate period will typically only be between one and five years, so it’s important
to remember that a fixed rate isn’t forever.
it’s more of a buffer, to give you a few years of financial surety in which you won’t
have to worry about interest rate changes or anything like that.
While we’re here, it’s worth mentioning that fixed rate home loans generally don’t
allow for much in the way of additional repayments you could even be charged a fee for doing so.
You may be able to find a fixed rate home loan with an offset account attached, but
beware of potential pitfalls – maybe the fixed rate period is only for a year, or maybe
it’s a partial offset instead of a 100% offset.
Lenders may also choose to charge a “break fee” if you pay out or refinance your home
loan within the fixed term – and these fees can be pretty hefty!
So, if you’re the type who wants to really get ahead on your home loan or you might want
to refinance or move in the near future, a fixed rate home loan may not match your financial priorities.
But they can be perfect for a wide range of borrowers, including first home buyers, refinancers looking
for a period of stability, and honestly anyone who loves being able to
budget everything down to the last dollar with absolute certainty.
Oh, I nearly forgot to mention!
At the end of the fixed rate period, you’ll usually be moved onto your lender’s revert
rate which might not be the cheapest interest rate out there!
This makes it crucial to shop around and compare your options before your fixed rate period ends.
Luckily, Compare the Market’s home loan comparison tool lets you weigh up a wide range
of home loans from a variety of lenders, and compare them on rates, fees, features and more!
They really do make it too easy.
And what’s more, if you find the right home loan for you, you can apply for it through
the same tool you’ve been using to compare.
So why would you settle for a higher rate!?
Compare home loans today, with Compare the Market.
Expert tips for choosing the right fixed rate home loan for you
Our General Manager of Money, Stephen Zeller, wants to make sure homebuyers are choosing a home loan with the right factors in mind. His top tips when it comes to fixed rate home loans are:
Stephen Zeller
General Manager – Money
Breaking a fixed loan can be pricey
Some homebuyers initially take out a variable rate home loan with the intention of fixing their rate later, in case they decide they don’t like the property or the suburb they’re living in. This way they can sell the home and pay back the variable loan without the costs of breaking a fixed-loan contract, which can be hefty.
Consider a packaged loan option
Some lenders may offer a lower fixed rate if you take out a ‘packaged’ home loan that comes with an annual fee for features such as an offset account. While offset accounts aren’t always available on fixed rate loans, a package often lets you split your loan so you can offset interest on a variable portion while locking in a lower rate on the rest.
We’re here to help
With so many different fixed rate terms and product options available, it can be daunting figuring out which products may suit your needs, whether you’re buying a new home or an investment property. Our online home loan comparison tool can provide you with an easy-to-read breakdown of the different rates available for various fixed terms to help you find a great rate, as well as provide an overview of any home loan products you’re interested in. We also have a team of home loan specialists on call who can talk you through any details or questions you’d like to ask, at no extra cost.
What is a fixed rate home loan?
Fixed rate home loans are a type of mortgage where the interest rate is locked in for a set period, usually one to five years. During this time, your interest rate and repayments stay the same, providing certainty and protection from interest rate rises.
Fixed rate home loans can be used for owner-occupied or investment loan purposes and you may be able to apply for interest-only or principal & interest repayments.
Why take out a fixed rate home loan?
Fixed rate home loan could be an option worth considering if you’re looking for certainty regarding your home loan repayments and don’t fancy the risk of facing an interest rate increase on a variable rate mortgage.
For borrowers with certain financial priorities, fixed home loan rates can offer:
- Certainty and stability, as you’ll know the exact cost of your home loan repayments for the length of your fixed-rate period
- Easier budgeting and cashflow management
- Protection against interest rate hikes
How do fixed rate home loans work?
During the fixed rate period, your home loan repayments generally remain the same, even if interest rates rise or fall. Once the fixed rate period ends, the loan usually rolls over to the lender’s variable revert rate unless you refinance or renegotiate a lower rate beforehand.
Lenders generally use the variable rate applicable to the product being assessed as the revert rate, which is often higher rate than the fixed rate a borrower is paying before reverting as it doesn’t include any discounts or special offers.
Fixed rate loans are also less flexible and may not include features such as an offset account, redraw, or unlimited extra repayments. You may also need to pay break costs if you end the fixed rate early or make extra repayments above the allowed limits.
What is a split home loan?
A split loan is a home loan that is divided into two parts: one with a fixed interest rate and the other with a variable interest rate. This allows you to keep part of your loan on a fixed rate, while leaving the rest of your loan subject to rate changes.
These changes could be rate cuts or rate hikes, so it’s important to keep in mind that your variable rate portion could become more or less expensive depending on interest rate movements.
What are pros and cons of fixed rate home loans?
Fixed rate home loans can offer repayment certainty and protection from interest rate rises but they may also limit flexibility and lead to potentially higher total costs if interest rates fall or you exit early. Some of the key benefits and trade-offs to consider before deciding whether a fixed rate loan suits your situation include:
| Pros | Cons |
|---|---|
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Should I fix my home loan?
Fixing your home loan may suit you if you want protection from potential interest rate rises, particularly if you expect interest rates to rise over the next few years. While fixed rate periods are usually limited to 5 years, locking in your rate can help with budgeting and cash flow, as you’ll know the exact cost of your home loan repayments for the length of your fixed rate period.
What to look for in a fixed rate home loan?
When choosing a fixed rate home loan, focus on more than just the advertised interest rate and take into account the comparison rate, fees, and the revert rate that applies when the fixed term ends. 
Here are a few things you should look out for when doing a fixed rate home loan comparison:
- Interest rates. Don’t just look at the advertised interest rate on offer; also look at the comparison rate of the loan and the revert rate, as this is likely to be the rate that you’ll be charged at the end of the fixed period if you don’t refinance or renegotiate your loan.
- Features. Fixed rate loans may not generally offer as many features as other types of loans, but some may still offer the ability to make additional repayments, a redraw facility or even an offset account. Keep in mind that interest rates and annual fees tend to increase as these features are added.
- Fees. Watch out for fees such as upfront, rate lock and annual package fees. Some lenders may not charge any of these on their fixed rate home loans, while some may charge higher-than-average fees. Be sure to check the key facts sheet of any home loan product you’re looking at to figure out what kind of fees you might end up on the hook for.
- The fixed rate period and loan term. Consider how long you would like to fix your interest rate for (usually between one and five years), as well as your desired overall loan term. Both these things will influence the overall cost of the loan.
You may want to speak to a financial advisor or to one of our expert online mortgage brokers at this stage to get a clearer idea of what you might want from a home loan.
How to manage a fixed rate home loan?
Managing a fixed rate home loan typically involves understanding your repayment commitments during the fixed period and planning for when that period ends. This may include reviewing your loan options and financial situation, building a financial buffer to prepare for the possibility of higher repayments once the fixed term expires, and avoiding unnecessary costs that may arise from exiting early.
Can I make additional repayments on a fixed rate home loan?
Yes, you can make extra repayments on a fixed rate home loan but they are typically capped with most lenders allowing $10,000-$30,000 in extra repayments annually or over the fixed period without any penalty.
Exceeding these thresholds can trigger an Early Repayment Adjustment (ERA) or ‘break cost,’ which can amount to tens of thousands of dollars.
What fees do fixed rate home loans come with?
Fixed rate home loans can come with several fees, including break costs, rate lock fees, and upfront or ongoing fees such as application or package fees, which are designed to manage interest rate risks and lender costs during the fixed term. The range of fees you’ll typically pay on your fixed rate home loan may include:
- Application fees and valuation fees. Often bundled as a part of the upfront fee, application fees are charged to begin processing your home loan, and valuation fees are charged by the lender so they can value your property and ensure you’re being lent the correct loan amount.
- Annual fees. You may be charged an annual fee on your home loan, which could cost as much as several hundred dollars, depending on the loan.
- Annual package fees. If you meet the eligibility requirements for a packaged home loan, the package may attract an annual fee (generally higher than standard annual fees) for the cost of the other products that make up the package, such as a credit card, car loan or insurance.
- Ongoing fees and one-off fees. Other potential fees include monthly service fees, late payment fees (if you miss a repayment) and redraw fees (if your loan allows it).
- Rate lock fees: Typically, non‑refundable, these fees are paid to secure a specific interest rate for a set period (usually up to 90 days) between loan approval and settlement. It may be charged as a percentage of the loan amount or as a flat fee, with flat fees often being more cost‑effective for larger loans compared to percentage‑based fees.
- Break costs/early repayment fees: Significant break fees can apply if you’re on a fixed rate loan and want to switch to a new loan, sell your property, or pay off your loan in full before the fixed term ends. Depending on how much of the fixed term remains, the difference in interest rates, and the size of the outstanding loan balance, break fees can sometimes reach thousands of dollars.
Check the home loan’s fact sheet and T&Cs for more information on each loan’s fees and charges and be sure to always read the comparison rate warning.
Can I break my fixed rate home loan?
Yes, you can break a fixed‑rate home loan by refinancing, selling your property, or paying off the loan before the fixed term finishes. However, this usually comes with a break fee, which can be significant.
In some situations, break fees may be lower. For example, if interest rates have risen since you locked in your fixed home loan or if you’re close to the end of your fixed term.
It’s a good idea to ask your lender for an estimate of the break costs and make sure you meet the lending criteria, including the required loan-to-value ratio (LVR), if you plan to refinance.
Do RBA cash rate changes affect fixed rate home loans?
RBA cash rate changes do not affect existing fixed rate home loans during the fixed period. Your interest rate and repayments stay the same while your rate is locked in, even if the RBA raises or cuts the cash rate.
However, the official cash rate has a major influence on home loan interest rates overall, as it affects how much it costs banks to borrow money. This means cash rate changes only affect you if you refinance, switch rates, or once your fixed term ends.
Compare fixed rate home loans today
Have you decided to get a fixed rate home loan? Well, you don’t have to go far to get one! Our home loan comparison tool can help you get started. Simply enter details about the loan you want, and our comparison service will present you with a range of loans to browse and choose from. If you see one you like, you can enquire about it and lodge a home loan application through us. Simples!
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.