Compare fixed rate home loans

When you have a mortgage, you will not only need to repay the money you’ve borrowed (the loan principal), but you’ll also be charged interest on your home loan. This interest may be charged at a fixed rate or at a variable rate.

A fixed interest rate loan involves locking in a rate for a set period - typically 1 to 5 years. During this fixed period, your interest rate, and therefore your home loan repayments, will stay the same. 

A variable rate is, however, subject to change as influenced by the Reserve Bank of Australia’s (RBA’s) cash rate, the Australian economy, the mortgage lender’s funding costs, among other factors. 

Homeowners can also choose both options. These ‘split rate’ loans are where interest is charged on part of your loan principal at a fixed rate, and on the remainder at a variable rate. This could let you enjoy some benefits of both rate types. 

Fixed rate home loans are available for both owner-occupiers and investors. Whether you’re a first home buyer or a long-time investor, if you meet the lender’s eligibility criteria, you may be able to apply for a fixed rate home loan. It's important to compare fixed-rate and variable options and consider your needs before deciding.

A home loan’s term is generally around 20 to 30 years, but your fixed rate period is usually much shorter. You can typically choose to fix your home loan rate for between 1 and 5 years, though a few lenders offer longer fixed rate terms.

This is for your benefit and the lender's. As a borrower, you wouldn’t want to lock yourself into a record-high rate and then miss out on lower rates in the future. Lenders also make money 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.

Once the fixed rate term ends, your home loan will generally switch to the lender's standard variable rate, also known as a ‘revert rate’. It’s worth learning your lender’s revert rate in advance if your fixed rate term is coming to an end, as revert rates are generally higher than the fixed rates most lenders offer.

Watch out for bill shock when your fixed rate is coming to an end. For example, many Australians took out record-low fixed rate home loans during the Covid-19 pandemic, and just a few years later found themselves face to face with the fixed rate mortgage cliff following multiple interest rate rises.

You generally have two options if your fixed rate term is ending and you don’t want to switch to 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 may have the option to haggle to stay on your current rate.
• 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 whether refinancing to a new mortgage lender may better suit your situation.

Choosing whether to fix your home loan rate is a tough decision, requiring you to do some research into the economy, the home loan market, and what may best suit your finances. While you may be able to lock in a low rate and avoid rising variable rates for a few years, you could also risk getting stuck paying a higher rate if your lender slashes its variable rates. 

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

The Reserve Bank of Australia (RBA)

Homeowners may ask themselves whether they should fix now, or wait to see if rates change further. While no one can predict where the market may move next with 100% accuracy, we do know that the days of home loan interest rates in the teens have been gone for several decades.

Not too long ago, Australia experienced the lowest home loan rate environment in its history. This was 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, after having not raised the cash rate in over 11 years.

However, from May 2022 the RBA began raising the cash rate to help tackle inflation, taking the cash rate from 0.10% in May 2022 to 4.35% in November 2023. Even if the RBA chooses to pause its rate-hiking cycle for an extended period, banks and mortgage lenders could still choose to make their own out-of-cycle rate hikes. Fixing your rate could help prevent future rate hikes from affecting your repayments, though you could miss out on some interest savings if the RBA chooses to cut the cash rate further in the future, which some bank economists are predicting.

The Australian economy

The RBA looks at what’s happening on a domestic and international scale when deciding whether to change the cash rate. Banks and mortgage lenders do the same when setting their home loan interest rates. You also may want to do something similar before deciding whether to fix.

Factors such as inflation, employment, the COVID-19 pandemic, share market crashes, overseas bank failures and other economic volatility may significantly affect the RBA’s decisions, as well as your lender’s, 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, and whether fixing your home loan interest rate will suit your personal financial situation.

The home loan that suits you best

Mortgage lenders frequently lift and cut interest rates out of cycle with the RBA, so 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. 

Can’t decide between fixed and variable rates? You could instead choose both. This is also known as a ‘split loan', or a split interest rate, where interest is charged at a fixed rate on part of your mortgage principal, and at a variable rate on the remainder. It doesn’t have to be a 50/50 fixed and variable split, but may be 80% fixed and 20% variable, or whatever other ratio the borrower and lender agree on.

A split rate home loan may offer the ‘best of both worlds’ for some home loan customers, with the perks and risks of both fixed and variable rate home loans, including access to flexible features like an offset account, and easier budgeting thanks to consistent part-payments.

However, your fixed portion of the home loan will also be locked for a set period, which may mean missing out on some potential savings if variable rates fall. And when this fixed rate reverts to a variable rate, this rate may be higher than your fixed rate and also different to your existing variable rate, meaning you could end up paying home loan interest at two different variable rates until you refinance.

Each home loan repayment is typically made up of part of the principal owing (the balance) plus an interest charge. But you may be able to choose to make interest-only repayments for a limited time, which involve just paying the interest charged on your mortgage.

With an interest-only home loan, your repayments will be lower during the interest-only period, because you won’t be repaying any of the loan principal during this time. But once the interest-only period expires, your principal and interest repayments will be higher. 

Interest-only home loan rates tend to be fixed, and interest-only periods often only last for between one and five years, unless you refinance. This is for your benefit, as by not paying off the principal owing, you are never reducing your debt, so you may pay more in total interest on your property over the long term. 

Who are fixed rate interest-only home loans for?

If you’re investing in a property, a fixed rate interest-only mortgage could help you to keep expenses low, maximising your potential returns on investment. This may be especially true if you don't plan to own the property for a long time, such as if you are thinking of “flipping” a house. Additionally, there may be tax benefits to this payment structure, as investors may be able to claim interest charges as a tax deduction.

Further, some first home buyers may opt for interest-only repayments for the first few years of their mortgage to get some extra breathing room in their budget. Saving up for a home can be extremely expensive, and interest-only repayments could offer borrowers an opportunity to build their savings buffer back up.

However, homeowners and investors should remember that their repayments may increase significantly after the interest-only period, when they revert to making principal and interest repayments. By only making interest repayments, you’ve effectively just shortened your mortgage term, while your loan remains the same size.

How do interest-only home loan repayments work?

Unsure how much your interest-only home loan repayments could cost you? Let’s break down how much your mortgage repayments could be on interest-only repayments versus principal and interest repayments.

On a 30-year, $500,000 interest-only home loan with a 5-year fixed rate of 5%, your repayments would be $2,083 in that initial interest-only period. After this time, it would increase to $2,923. Comparatively, making principal and interest repayments would cost you $2,684. 

Interest-only vs principal and interest repayments: 

Source: ASIC Money Smart interest-only calculator. Based on a 30-year, 500,000 home loan at a rate of 5%. Option A is a 5-year interest-only period, which then reverts to 25-year principal and interest repayments. Option B is 30-years of principal and interest repayments. 

So, while you may save more in the first five years with interest-only repayments, your repayments will jump by almost $900 after your interest-only period ends. Additionally, it could cost you $35,606 more in higher repayments over the life of the loan.

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