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Should I fix my home loan interest rate?

Jodie Humphries avatar
Jodie Humphries
- 4 min read
Should I fix my home loan interest rate?

Buying a home is an important life event for everyone, and finding a suitable home loan plays a huge part in making it possible. However, what many people struggle with is deciding whether to fix the interest rate or not. There are pros and cons with both choices, and with a little understanding of how the two interest rates work, you can choose what suits your needs.

What’s a fixed-rate home loan?

Let’s begin by understanding what a fixed-rate loan is. This is a home loan where the interest rate is pre-set for a specified period; typically 1, 3 or 5 years. During this time, you’ll know exactly how much you need to repay every month, regardless of changes to the Reserve Bank’s official cash rate or any fluctuations in the international financial markets, which could affect variable interest rates.

However, you may have to accept certain limitations with a fixed rate home loan, like potentially having no access to an offset account, or having to pay fees for breaking or modifying the contract.

A fixed rate loan usually reverts to the lender’s variable rate at the end of the agreed-upon fixed period.

Understand the pros and cons of fixing your home loan

There are positives and negatives of choosing to go for a fixed rate. What matters is which home loan interest rate suits your needs.

Pros

  • With a fixed loan rate, you can plan your monthly budget much better, since you know the payment amount won’t change during the fixed period.
  • You are insulated against rising variable interest rates, so you don’t have to worry about your mortgage repayments increasing.

Cons

  • You won’t benefit from any drop in variable interest rates, so you might actually end up paying a higher rate.
  • If you wish to get out of your fixed home loan, you might have to pay costly break fees. This is a payment made to the lender for breaking out of the contract.
  • You might also not be able to make extra repayments without paying a break fee.

When is a good time to fix my home loan?

‘Should I fix my home loan now?’ is a question that comes to mind for most home loan borrowers and often, during the home loan payment journey.

How do you know when it’s a good time to fix the loan? The answer will depend on your personal financial situation, though there are a few scenarios where fixing you loan could be worth considering

For example, if you believe that rates will rise in the future and current fixed rates are lower than usual, you could consider fixing. On the other hand, if you think variable interest rates have reached their peak and are going to start falling, you may prefer to avoid fixed rates.

When interest rates are rising, it could be a suitable time to fix. Do your homework and calculate how high variable rates have to go before you begin to save with fixed-rate home loans.

When finalising your mortgage, take time out to work out the difference between fixed and variable rates. Compare home loans online before making the decision.

When should you not fix your home loan?

A fixed-rate home loan could offer you numerous advantages over a variable rate home loan. But certain situations may not be conducive to fixing your home loan, depending on your plans for the future.

Fixing your loan may not be a suitable choice under circumstances such as: 

  • You plan to make large extra repayments on your loan.
  • You intend to sell your property during the fixed term.
  • You wish to refinance your home loan within the fixed term.
  • You plan to renovate your home or build a new one within the fixed period.
  • You might not wish to be locked in with a particular lender or loan product for a fixed period.

Whether you’re buying your first home or seeking to refinance your current mortgage, you need to do your homework before finalising a home loan. Read the product disclosure statement (PDS) thoroughly to familiarise yourself with all the terms and conditions before signing up.

Are you looking to fix your home loan? Look for a great fixed home loan with the RateCity home loan comparison tool. 

Disclaimer

This article is over two years old, last updated on November 12, 2020. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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Product database updated 28 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.