Deciding on a fixed rate home loan

When you’re comparing fixed rate home loans, working out the best options to suit your financial needs can be tricky. Learning more about how fixed rates work, as well as variable rates and split rates, may be able to help you make your decision. 

What is a fixed rate?

Many home loans have variable interest rates, where the lender may choose to raise or lower based on a range of economic factors, from the cost of overseas funding to the current national cash rate, set by the Reserve Bank of Australia (RBA). When your variable interest rate changes, so will the cost of your mortgage repayments, which could make your household budgeting more challenging. 

A fixed rate home loan gives you the option to lock in your interest rate for a predetermined length of time (the fixed rate period), often between one and five years. During this time, your mortgage repayments will always stay the same, regardless of any changes your lender makes to its variable interest rates. 

At the end of your fixed rate period, you may have the option to re-fix your loan. Otherwise, your loan will revert to a variable interest rate. Keep in mind that if interest rates have been rising during your fixed rate period, this revert rate could be higher than you expect, putting you at risk of experiencing bill shock. 

What are the benefits of fixed interest rates?

• Simpler budgeting: When you know in advance exactly how much you’ll be paying for your home loan, and can be confident it won’t change any time soon, planning your household budget can be much simpler.  
• Protection from rate rises: While borrowers on variable interest rates may see their household expenses increase if rates rise repeatedly, borrowers on fixed rates may be spared these ballooning household costs. 

What are the risks of a fixed interest rate?

• May miss out on rate discounts: Even if your lender was to lower its variable interest rates, such as if the RBA was to cut the national cash rate, borrowers on fixed interest rates would keep making the same repayments for the remainder of the fixed rate term. 
• Less flexible: Fixed rate home loans may not offer as many of the flexible features that may be available with variable rate mortgages. For example, you may not be able to make as many extra repayments, or benefit from a redraw facility or an offset account. Plus, you may not be able to refinance your home loan during the fixed rate period without paying break fees, which can be expensive. 

Split home loans

If you’re not sure whether a fixed rate or a variable rate will be the best choice for your home loan, another option you could consider would be a split home loan. In this arrangement, interest will be charged on a percentage of your mortgage balance at a fixed rate, and on the remainder at a variable rate. 

This arrangement could potentially let you benefit from the best of both worlds, as the fixed rate could help keep your mortgage repayments stable while the variable rate could allow you to benefit from greater flexibility.

Keep in mind that just like a more typical fixed rate loan, the fixed rate on a percentage of your split mortgage will eventually revert to a variable rate, which may not be the same as the variable rate you’re already paying – you could end up paying two different variable rates on your mortgage!

Who are fixed rate home loans good for?

Fixed interest rates can appeal to a variety of different borrowers, with different financial goals. 

For example, some first home buyers may prefer a fixed interest rate while they’re first getting into the routine of managing mortgage repayments, as this may help minimise the risk of surprises. 

Refinancing onto a fixed rate home loan could be an option for some mortgage holders to consider if they’re concerned about the potential effect of rising interest rates on their household budget.  

And some investors may choose to lock in a fixed interest rate when making interest-only repayments to help keep the cost of their investment consistently low for a length of time. 

A fixed interest rate may not always be the best choice for every borrower, so it’s important to consider your financial situation and personal goals before making any decisions. 

If you’re not certain whether a fixed, variable or split home loan may be the best choice to help you reach your financial goals, you could consider contacting a mortgage broker. 

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