Some lenders allow you to fix the interest rate on your mortgage for a length of time, to enjoy greater stability and simpler budgeting in your personal finances.
RateCity has the details of a wide variety of fixed rate mortgages available to compare all in one place, so you can save time and effort when narrowing down your shortlist of lenders to help you buy a new home or investment property, or to refinance your current mortgage.
Why a fixed interest rate?
One of the primary benefits of choosing a fixed rate mortgage is enjoying greater financial security. By fixing your interest rate in advance, you’ll know just how much your mortgage repayments will cost from month to month for the duration of the fixed term, which can help to simplify your budget. Even if your lender starts raising its variable interest rates in response to the Reserve Bank of Australia (RBA) raising the official cash rate, your home loan’s fixed repayments will remain just as affordable for the time being.
On the other hand, if the RBA cuts the cash rate, your lender won’t pass this cut on to your fixed rate home loan – you’ll still be making interest payments at the same rate until the fixed term ends.
It’s also worth keeping in mind that most interest rates can only be fixed for a limited number of years, and afterwards will revert to the lender’s standard variable rate. If you don’t plan your budget accordingly, you could find yourself surprised by a sudden jump in repayments, especially if interest rates rose significantly during your loan’s fixed term.
Finally, while fixed rate home loans tend to be simple and affordable, they’re not always as flexible as their variable-rate counterparts, and are more likely to lock you into a fixed repayment plan, with significant break fees if you change your loan terms before the fixed period is up.
Fixed interest rate pros and cons
- Consistent repayments each month
- Simplified budgeting
- Protection from interest rate rises
- No benefit from interest rate cuts
- Less repayment flexibility
- Costly break fees
Should you split your rate?
If you want the security of a fixed rate home loan, but would also appreciate the flexibility of a variable interest rate, you may be able to get the best of both worlds with a split rate home loan.
These mortgages charge a fixed rate of interest on a percentage of your loan’s balance, and a variable rate on the remainder, so you can enjoy some savings when interest rates are cut, but keep your repayments manageable if rates rise.
What are Comparison Rates?
Most lenders not only charge interest on their mortgages, but fees as well. Even if you choose a home loan with an affordably low fixed interest rate, if your lender also charges high fees, you may ultimately end up paying more for your property than if you’d opted for a mortgage with a higher interest rate and lower fees and charges.
To help show the overall cost of different loans more clearly, lenders are required to display Comparison Rates alongside their advertised interest rates. These percentage figures combine the overall cost of each loan’s interest rate and its standard fees and charges, and can be used to approximately gauge the relative affordability of different loans.
It’s worth remembering that some loans also have nonstandard costs that aren’t included in their Comparison Rates, and that Comparison Rates also don’t account for any bonus features that could add extra value to certain loans. It’s usually worth doing some further research after narrowing down your shortlist of mortgage options by their comparison rates.
How your loan term affects your interest
The length of the fixed-rate period on your home loan is important, as this is the length of time that your repayments will remain unaffected by rate rises. But it’s also important to think about the overall length of your home loan’s term, as this can affect how much interest you’ll pay in total over the lifetime of the loan.
Most mortgages start with a term of 25 or 30 years, though shorter and longer options are also available. If you choose a shorter home loan, you’ll make a smaller number of repayments, each one for a larger percentage of the loan’s principal. While this may make the monthly repayments less affordable, fewer repayments also means fewer interest charges, so you’ll pay less interest in total over the lifetime of the loan.
Conversely, stretching out your home loan over a longer term means making more repayments, each one for a smaller percentage of the principal. While each of these repayments may be more affordable from month to month, you’ll find yourself being charged interest a greater number of times, and may ultimately end up paying more in total interest than if you’d opted for the shorter loan term.
Fixed rate home loans for different buyers
First Home Buyers often find the security of fixed rate home loans appealing, as the stability they provide over the first few years of a mortgage can help borrowers keep their finances under control while they build up their equity. Some lenders provide special discounted rates as an introductory offer for their mortgages, though borrowers should remember that when these “honeymoon rates” expire, they will revert to the lender’s standard rates – be sure to budget accordingly!
Investors can also find the stability of fixed rate home loans useful, as they can help to keep the loan’s repayments from increasing beyond the property’s rental income during the fixed period, and ensure a steady stream of income from the investment.
Refinancing a mortgage onto a lower interest rate can help to reduce your repayments and provide additional affordability. If your lender allows you to do so, fixing this interest rate for a few years can let you keep enjoying this added affordability for longer. This can be good news for both investors and owner occupiers, especially those who are buying their next home.
Offset accounts and redraw facilities
Fixing the interest rate on a home loan can often also mean agreeing to a fixed repayment plan, where you’re expected to pay back your loan on a predetermined schedule for the duration of the fixed rate period. This may put restrictions on your ability to pay extra money onto your mortgage and get ahead on your repayments, even if the money becomes available from a tax refund, a work bonus, or even a statistically-improbable lottery win.
But some lenders allow borrowers to freely make extra repayments onto their fixed rate home loans, and a few even offer some additional features to help provide further financial flexibility.
A redraw facility will allow you to withdraw the surplus balance from your home loan when you get ahead on your repayments, subject to your lender’s terms and conditions. This means that if you have spare savings available, you can pay them onto your mortgage and bring you closer to making an early exit from the loan, confident that you’ll still be able to put this money back in your pocket again in case of emergency.
An offset account works just like a regular savings or transaction account, but with one major difference – it’s linked to your mortgage. Whatever money you pay into an offset account is included when your lender calculates its interest charges.
If you have $15,000 in your offset account, and have paid back $200,000 of a $500,000 loan, you’ll only be charged interest on $285,000, rather than $300,000, saving you a bit of money.
Compare fixed rate home loans
With a variety of fixed rate home loan options available to choose from, what is the best way to make your mortgage decision? While low interest rates are important to consider when looking at any home loan, there are also comparison rates, terms and conditions to keep in mind.
RateCity provides you with the essential details of Australia’s many fixed rate mortgages, and puts them all in one place for simple and efficient reference. With the help of this information, you can determine which lenders offer the interest rates and home loan features that best match your financial situation, and make a more informed decision when selecting your next mortgage lender.
*The phrase ‘some of the top’ is not a recommendation or rating of products. This page compares a range of home loans from selected providers, not all products or providers are included in the comparison. No home loan is one size fits all. The best home loan for you will not be the best home loan for someone else. As a result, it's worth getting advice on whether a product is right for you before committing.