What is a fixed rate home loan?

Fixing your home loan interest rate can help keep your mortgage repayments stable and consistent for a limited time, for simpler budgeting and additional peace of mind. There are also other benefits to consider, along with a few risks, before you look at signing up for a fixed rate home loan.

What does it mean to fix your home loan interest rate? 

Many Australian home loans are on variable interest rates, where the lender may choose to raise or lower the amount of interest they charge. A range of factors affect home loan interest rates, from the cost of the bank’s overseas funding to Australia’s national cash rate, set by the Reserve Bank of Australia (RBA).

When a bank changes its variable interest rates, it can affect the mortgage repayments of its existing customers. If the lender lowers its rate, mortgage holders may be able to enjoy reduced home loan repayments and some budget relief, or keep making the same repayments and make progress towards an early exit from the loan. But if the lender raises its rates, mortgage holders can expect their home loan repayments to increase, putting pressure on their household budgets.

Borrowers wanting to avoid uncertainty around variable interest rates may instead choose to fix their interest rate for a limited time, often from 12 months to five years. During this fixed rate period, the interest you’re charged will remain the same, regardless of whether the lender raises or lowers its variable rates.

Once this fixed term passes, your home loan will revert back to a variable interest rate, which may rise or fall in the future and affect your repayments.

What are the benefits of fixed rate home loans?

• Simpler budgeting: Keeping your repayments consistent like this can be helpful for organising your household budget, so your personal finances can remain steady and more secure.
• Potentially avoid rate rises: If you fix the interest rate on your home loan before your lender starts raising rates, it’s possible you could end up saving money on interest payments if variable rates rise higher than your fixed rate. While most lenders factor potential future rate rises into their fixed rates (generally fixed rates are higher on loans with longer fixed rate terms), at the very least you’ll be spared the budget shock of your mortgage repayments rising regularly.
• Build equity OR keep costs down: Choosing a principal and interest fixed rate loan means each repayment will help build the equity in your property, giving you more options to consider down the track. Choosing an interest only fixed rate loan can help to keep your repayments low and consistent for a limited time, though you may end up paying more interest in total on the property over the long run.

What are the risks of fixed rate home loans? 

• Potentially miss out on rate falls: If your lender chooses to lower its variable rates, you’ll keep paying the same fixed interest rate, even if it’s higher. This could mean missing out on some interest savings.
• Limited time only: Australian lenders are unlikely to agree to fix your interest rate for your home loan’s full term, which is commonly measured in decades. While you may be offered the chance to re-fix your home loan upon the expiry of your fixed term, at some point you may have to revert to a variable rate, which could have risen significantly in the meantime.
• Less flexibility: Fixed rate home loans are less likely to offer as many flexible features and benefits as their variable rate counterparts, such as unlimited extra repayments, a redraw facility, or an offset account. Also, you may not be able to refinance and switch to another lender during the fixed rate term without paying break fees, which can be expensive.

Who are fixed rate home loans good for?

Many different borrowers may be able to benefit from fixing their home loan interest rate, and for different reasons.

For example, a first home buyer may choose to fix their rate to help protect their budget from the risk of rising rates while they make a start on managing their repayments and starting to build equity in their property.

A property investor may appreciate an interest-only loan with a fixed rate, as this can help you keep the expenses of their investment under control for a limited time.

You’ll need to compare home loans and take a look at your personal financial situation to work out whether a fixed rate home loan may be the best choice or you. If you need help comparing options and working out whether a fixed rate loan will offer your great value, a mortgage broker may be able to help .

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