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What is a fixed home loan rate?

Home loan repayments are composed of two key parts: repayments of the principal, and the interest. When repaying a mortgage, you will be paying off not only the loan amount (principal) but the interest the lender charges you for the privilege of having a home loan. There are also two different repayment types: fixed rates and variable rates.

As the name suggests, a fixed interest rate is one that is fixed, or locked in, at that number and will not change for a set period. This is typically from 1 to 5 years, with longer fixed terms potentially on offer from some lenders. Comparatively, a variable rate is subject to change as influenced by the Reserve Bank of Australia’s cash rate, the Australian economy, and the home loan lender.

Homeowners who may not want to pick between these two options can choose both, also known as a ‘split rate’ loan. This doesn’t have to be 50/50 fixed and variable, but may be 80% fixed, 20% variable, or whatever the borrower and lender agree on.

Fixed rate home loans are available for any borrower type, meaning owner-occupiers and investors may qualify. Whether you’re a first home buyer or a long-time investor, as long as you meet the eligibility criteria of the lender, you may be able to apply for a fixed rate home loan.

What are the pros and cons of a fixed rate mortgage?

There are advantages and disadvantages of choosing a fixed rate mortgage. A fixed rate may offer more stability in your budgeting, as your ongoing mortgage repayments will not change for the duration of your fixed term. For example, over 3 years your monthly mortgage repayments may remain, say, $1,500. This allows you to easily budget and organise your expenses for said month as this will remain the same.

You may also be more immediately protected from interest rate fluctuations with a fixed rate home loan, which are likely to occur over a 20–30-year mortgage. If rates were to rise during the fixed period, whether due to the cash rate lifting or your lender hiking out-of-cycle with the RBA, your mortgage repayments are locked in at that lower rate.

However, if rates were to decrease, your mortgage repayments would be fixed at a higher rate. This may cause you to miss out on potentially lower mortgage repayments from a rate cut because you opted to fix your home loan.

Further, fixed rate mortgages may be more limited in their flexibility. Variable rate home loans generally come with access to more home loan features, such as an offset account or a redraw facility.  And, if you want to refinance your home loan and you've fixed your interest rate, you may have to pay break costs for ending the fixed rate period early.  

Pros of fixed rate home loans:

  • Good for budgeting
  • Protected from rate hikes

Cons of fixed rate home loans:

  • Miss out on rate cuts
  • Less flexibility

What are the features of a fixed rate home loan?

It’s worth noting that fixed rate home loans generally come with fewer features than variable rate home loans. if home loan features are something you want to prioritise in your comparison, this may impact your decision between fixed or variable rate loans.   

Home loan features may include an offset account, redraw facility and making extra repayments. Some lenders may reserve these features for their variable rate products only, and even charge fees for any additional repayments made with a fixed mortgage. You may also find that any home loan offers, such as cashback deals or packages, are reserved for variable rate home loans as well. 

It may be worth reviewing what features, if any, are available with a fixed rate home loan before applying.

How long can you fix a home loan rate for?

While a home loan term is generally around 20-30 years, your fixed rate period is usually much shorter. You’ll have the choice of fixing your home loan rate for between 1 and 5 years, with longer terms up to 10 years potentially available from some lenders. 

This is for your benefit and the lender's, as you wouldn’t want to lock yourself into a record-high rate and then miss out on lower rates in the future. On the other hand, lenders earn profits from the interest you pay, so it’s not in their best interest to let homeowners stay on record-low rates for 20+ years either.

With 10-year fixed rates being rare, you may want to start a search for a fixed rate loan looking at 3-year fixed rates, 4-year fixed rates, or the more standard maximum length, 5-year fixed rate loans

Once the fixed rate term ends, your home loan will generally switch to the lender's standard variable rate. This is also known as a ‘revert rate’, and it’s worth being aware of your lender’s revert rate if your fixed rate term is coming to an end. Generally, the revert rate is higher than most fixed rates offered by lenders.

You generally have two options if your fixed rate term is ending, and you don’t want to be on the lender’s revert rate:

  • Request to re-fix your existing home loan. You’ll typically be put onto one of the lender’s current fixed rate options, but you do have the option to haggle to go on the same rate you are currently on.
  • Refinance your home loan. If you’re not happy with the variable interest rate or new fixed rate offered by your lender, you may want to consider if refinancing to a new home loan lender may suit your situation better.

Is now the right time to fix your mortgage?

Making the decision to fix or not to fix your home loan rate is a tough one and requires you to do some research into the economy, the home loan market, as well as what may best suit your finances.

There are a few things to keep in mind when making this decision:

  • The Reserve Bank of Australia

Often, the biggest question facing homeowners is whether they should fix now or wait to see if rates fall further. This is where it’s important to remember that no one can predict the bottom of the market. What we do know is that the days of home loan interest rates in the teens have been gone for several decades.

We’re currently in the lowest home loan rate environment in Australian history. This is due to the state of the Australian economy, as well as the Reserve Bank of Australia (RBA) cutting the cash rate down to a record-low number. In fact, the RBA has not hiked the cash rate in around 11 years, with the last cash rate increase in November 2010.

If you believe that the cash rate may lift in the next few years, you may want to consider fixing to try and prevent rate hikes from affecting your repayments. RBA Governor Philip Lowe predicts this may occur in 2024, while some big banks predict rate rises as early as 2022.  

  • The Australian economy

The RBA takes stock of what is happening on a domestic and international scale when making its decision around whether to change the cash rate. This means that you may want to do the same when deciding whether to fix.

Events such as the COVID-19 pandemic, share market crashes and general volatility may significantly affect the decision of the RBA, as well as your lender, around lifting interest rates. It may be worth doing your research in this area to make a more informed decision around if, and when, rates may lift again.

  • The home loan that suits you best

Home loan lenders frequently lift and cut interest rates out-of-cycle with the RBA. Trying to lock in the perfect moment to fix may be a fool’s errand. This means you may be better off weighing up the RBA’s movement and the economy against whether a fixed rate home loan suits your budget and finances more than a variable rate loan.

For example, imagine you opt for a variable rate home loan with an offset account. Your lender hikes your variable rate a few years into your repayments, but you may not feel the impact as much as you’ve been steadily depositing funds into your offset account. 

This is why choosing the right repayment option for your home loan is also about comparing any potential upfront or ongoing fees, and the features and flexibility offered by the loan. 

How much will you pay with a fixed rate home loan?

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What is a split interest rate?

Homeowners who may not want to pick between fixed and variable rates can choose both. This is also known as a ‘split loan', or split interest rate. It doesn’t have to be 50/50 fixed and variable, but may be 80% fixed, 20% variable, or whatever the borrower and lender agree on.

A split rate home loan may be a ‘best of both worlds’ option for some home loan customers. You may be able to enjoy the perks and risks of both fixed and variable rate home loans, including access to features like an offset account, and easier budgeting with consistent part-payments of the mortgage.

However, your fixed portion of the home loan will also be locked into a set period, which may then revert to a variable rate. As mentioned above, the revert rate may be higher than your fixed rate and different to your existing variable rate, meaning you may be paying interest at two different variable rates.

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How to compare fixed rate loans

It’s important to research and compare all your options when choosing your fixed rate home loan lender. Thankfully, there are a range of comparison tools available that can help take the hassle out of this process, including:

  • Comparison rates 

There is more to a home loan than the interest rate itself. It’s important to compare other costs, such as upfront or application fees, ongoing fees like annual package fees, and any break costs. Comparison rates consider not just the advertised rate, but most of these upfront and ongoing costs, based on a $150,000 home loan over a 25-year term.

While that loan amount may be considerably lower than the average person’s mortgage – especially in a capital city - it may come in handy in helping to provide a more accurate picture of the 'true' cost of the loan. If the comparison rate is significantly higher than the advertised rate, you may be safe to assume that the lender charges significant fees compared to other loan options.

  • Comparison tables

Comparison tables are a helpful tool that allows you to compare apples with apples. Meaning, you can filter down and view a range of fixed rate home loans side by side as determined by your specific needs. You can use these tables to sort your results by factors important to your search, such as lowest rates or most features. This may help you to make an easy shortlist for your home loan comparison.

RateCity’s comparison tables also give you the option of comparing fixed rate loans against other lenders, including the big four banks. If you’ve only ever stuck with the bank of your childhood, this feature may help you determine which lender could provide the best value fixed rate home loan

  • Home loan calculators

Home loan calculators are also another tool to help you in your fixed rate home loan search. Firstly, a borrowing power calculator may help indicate just how much you may be approved to take out in a mortgage. RateCity’s Borrowing Power Calculator may also be able to point you towards lenders that may approve borrowers for said home loan amount.

Finally, the Mortgage Repayment Calculator may help you to narrow down your shortlist of home loan options based on which best suits your budget. Enter your details, including interest rate, loan amount, borrower type (owner-occupier or investor),  repayment type (principal & interest or interest only) and repayment frequency (weekly, fortnightly or monthly repayments) to see your estimated mortgage repayments, including interest repayments.

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

Are fixed rates or variable rates cheaper?

Fixed and variable home loan interest rates are discretionary based on the lender’s decision. They will also be influenced by the Australian economy, as well as the Reserve Bank of Australia’s cash rate. The specific interest rate you may be offered will also depend on your credit history and financial situation.

Whether a fixed or variable rate home loan is the cheaper option for you will depend on all the above, and may still fluctuate over a 25-year home loan term. Therefore, it’s worth comparing your loan options with our comparison tables to see how the rates compare, based on your specific financial needs.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

Fact Check Verification

The information on this page was fact checked by Chris Brown, a broker in New South Wales specialising in home loans, car financing, debt consolidation, short-term finance, non-conforming finance, business finance, and asset financing. For more information on how brokers like this can assist you, look for a broker near you