Fixed home loan rates

Fixed rate home loans explained

When you take out a home loan to buy a home or investment property, you can choose between 2 interest rate types: fixed and variable.

While variable rates can rise and fall at the lender's discretion, fixed rates don't change during the "fixed" period – usually between 1 and 5 years, though it can be up to 10 years.

If you decide to fix your rate, it means that if variable rates drop, your repayments won't change. You may also have to wait to refinance and take advantage of a lower rate.

Here are a few quick facts to keep in mind about fixed home loan rates:

• Interest rate. Historically, fixed interest rate loans have typically been more expensive than variable rate loans, though this always depends on the specific loan and lender. In the first half of 2020, this trend began shifting, and in 2021, the majority of lenders now offer fixed rate loans that are lower than variable rates.
• Flexibility. A fixed rate mortgage is less flexible than a variable rate loan because you are "locked in" to the loan for the time period that you signed up for. A fixed rate loan is a contract.
• Extra repayments. You might not be able to make extra repayments on your loan, meaning you can't make headway on your loan principal by paying more than the scheduled repayment each month.
• Break costs. If you want to sell the property or refinance to another loan while you're still in a fixed loan contract, the break fee you'll be charged for leaving the mortgage can be substantial – thousands, or even tens of thousands, of dollars.
• Features. If you have some savings behind you and you're looking for loan features like an offset account with your loan, then a fixed rate loan may not be suitable. Fixed rate loans with offset accounts are comparatively rare.

Are fixed rates cheaper than variable loans?

Right now, interest rates on fixed rate loans are cheaper than variable rates. But historically, it's usually been the case that fixed rates are slightly higher than variable.

In the latter half of 2019, the most competitive fixed rates were equal to their variable counterparts. Since the onset of the pandemic, fixed rates have plunged. Now, they're actually slightly cheaper or equal to variable rates.

By late 2021, we began to see fixed rates start to trend upwards again.

If you decide to fix your interest rate, keep in mind that it is very difficult to "beat the bank" (that is, lock in a rate that is lower than the variable rate for the duration of the fixed term, thereby paying the bank less for your loan over the full fixed term period).

This is why the key thing to appreciate is that a fixed home loan rate is about balancing a good rate with certainty about set repayments. If you're happy with the rate and don't think you'll need to refinance or sell the property any time soon, then fixing may be a good move.

The benefits of fixing your loan

• In the current market, the biggest benefit of fixing your home loan rate is the interest rate savings. Fixed rate loans are the lowest they've ever been and it's cheaper to fix than have a variable rate loan.
• The next biggest advantage is that your repayments won't change. This can give you a sense of certainty around your repayments; you can budget and know your loan repayments are consistent until the fixed period ends.
• If variable interest rates rise during the fixed rate period, you might end up with a better rate than the average.

The disadvantages of fixing your loan

• Fixed rate loans don't offer as much flexibility compared to variable rate mortgages, so you often can't make extra repayments or make changes to the loan without paying fees and penalties.
• Most lenders don't offer fixed home loans with 100% offset accounts. This means if you have any savings, you won't be able to offset them against the interest you pay on your mortgage.
• If you need to leave the loan for any reason, you'll pay a break fee. Refinancing, a new job, moving overseas, getting divorced: none of these reasons will give you a "get out of jail free" card with your lender. Read this guide to learn more about breaking a fixed rate loan.
• Lastly, there's the chance that variable interest rates could drop lower. Those with variable mortgages will then get lower repayments, while yours stay fixed.

What happens when my fixed rate home loan ends?

When your home loan's fixed period ends, your loan will automatically switch to a variable loan with the same lender, and you'll pay the variable rate that the lender charges at the time.

There's no possible way to know what the variable rate will be 1 to 5 years into the future, but when you sign up for the loan, your bank will tell you their current revert rate. This is the variable interest rate that your fixed loan would switch to after the fixed period if interest rates were to remain the same over that period.

The variable rate you end up paying may be higher or lower.

Importantly, once your fixed rate ends, you will be free to refinance your loan – at which point, you can choose whether to refinance to a lower variable rate or sign up for another fixed rate period.

What happens if I want to end my fixed rate home loan early?

It may be possible to end your fixed rate loan contract early – however, there could be a hefty price to pay.

A fixed rate home loan is a legal contract between you and your lender, which guarantees that you'll repay a fixed amount of interest on a loan over a specified time period.

If you decide to break that contract by switching loans or lenders or selling the property and closing the loan altogether, your existing lender will want to be compensated for any loss they incur.

Breaking a home loan during a fixed interest period can be expensive. It is calculated using a number of factors: learn how break costs are calculated.

Do fixed rate home loans let you make additional repayments?

Some fixed rate home loans let borrowers make additional repayments. These extra payments can be made usually up to a limit set by your lender.

In most cases, if you make additional repayments above the set limit or repay the fixed rate loan in full, you may incur additional break costs for early repayment. Check the outline of fees with your lender before you start to make additional repayments.

How do I compare fixed rate loans?

To find a good fixed rate product that may suit your needs, consider the following 5 important questions.

1. How long do I plan to live here? Not sure whether you want to stay in your home long term? Considering moving in the next 12-24 months? Or are you simply not sure what the future holds and you don't want to be locked in? If there is any chance you may wish to sell the property during the fixed rate period, then think twice before signing up for the loan. Break costs can be very expensive.
2. What are the interest rates on offer? For any home loan interest rate, a lower rate is obviously going to save you money. But as mentioned above, that's not the only consideration. If there's a chance you may need to sell the property or you're not sure of your plan in the next few years, it might be worth looking at variable rates to see if a competitive rate is on offer.
3. Are there any other fees I need to know about? Another consideration is the fees and charges your lender charges. Always pay attention to a loan's fees, especially annual or ongoing fees. These can quickly add up and cancel out all the benefits of the lower interest rate.
4. What fixed rate period should I lock in? Fixed rate borrowers have to choose terms between 1 and 5 years. Most loans give you multiple options, with different rates for each. Shorter fixed periods are typically lower, so 1-year terms are more competitive than 5-year terms.
5. What are my short-term property goals? If you want to make extra repayments into your loan to chip away at the loan principal as quickly as possible, then a fixed rate loan may not be the best option as extra repayments are often not allowed on these types of loans.

What to ask your bank before fixing your home loan

Fixed versus variable rates: what are the differences?

Can fixing be cheaper even after paying break costs?

Breaking a fixed rate loan to refinance to a lower rate can be expensive. But if your repayments get significantly lower after ending your fixed rate loan, you could still end up saving money in the long run.

Let's look at a quick example. Say you have a 3-year fixed rate loan with 1 year left on the fixed period.

You fixed your rate at 3.90% and you have $400,000 remaining on your loan. The loan term is 30 years. Because fixed rates are lower now, your lender is offering a fixed rate of 2.40% for new borrowers.

You can use this lower rate to get a rough estimate of your loan break costs. The difference in your original fixed rate versus the current offer of 3.00% can stand in for the more complicated difference in funding costs. The following is the basic break fee calculation:

• Loan amount ($400,000) x fixed period remaining (1 year) x rate difference % (0.60%) = $2,400

Keep in mind that this is an estimate only, and every lender has its own way of calculating break costs. A number of things are factored in, including the following:

• The length of the fixed rate term remaining
• The value of the loan
• The lender's current fixed rate offer
• The current Bank Bill Swap Rate (BBSR)

Assuming that your break cost is $2,400, as per our example above, consider the potential savings if you switched to a much lower rate from another lender, such as 2.19%. You'd save money in the long run, even when paying the $2,400 break fee because your repayments would be lower.

In the first year after switching, you would save around $2,000 even after paying the break cost.

After the first 12 months, you'd save even more over the life of the loan if the 2.19% interest rate is lower than the variable rate on offer at the time.

What is a split rate loan?

This could be the ideal solution if you're not quite sure whether you should go for a fixed or a variable rate loan.

Many lenders allow you to split your loan into fixed and variable portions, which essentially lets you hedge your bets.

For instance, you could choose to lock in 70% of your loan to a fixed rate. The benefit of this is the lower interest rate and repayment certainty. You then attach the remaining 30% to a variable rate home loan. The benefit of this is that you can still access features like an offset account to pay less interest based on your savings. Also, if you ever have to end your loan for any reason, the break cost will be lower as only 70% of the loan's value is fixed.

A split loan may be the best of both worlds. If you're still not quite sure which option is best for you, consider speaking to a mortgage broker for expert advice.