A fixed rate home loan is a mortgage where the interest rate is locked in for an agreed period.
During that fixed period, your required repayments generally remain predictable, provided the loan balance and repayment type do not change. This can make budgeting easier and protect you from interest rate rises while the fixed term is in place.
The trade off is the flexibility.
A fixed rate can give you certainty, but there may be restrictions on additional repayments, redraw facilities, refinancing, or changing the loan before the fixed period ends. Depending on your lender and loan terms, making certain changes may also result in a break cost.
How does a fixed rate home loan work?
When you take out a fixed rate home loan, you agree to pay a set interest rate for a nominated period.
Fixed periods vary between lenders, although terms of up to five years are commonly offered by major Australian banks. The rate that applies may also depend on factors such as whether the property is owner occupied or an investment, and whether repayments are principal and interest or interest only.
At the end of the fixed period, the loan will usually move to the lender’s applicable variable rate unless you choose another option, such as fixing the rate again or refinancing. The precise process depends on the lender and the terms of your loan.
This means the rate you move onto at the end of the term may be higher or lower than the rate you originally fixed.
What are the benefits of fixing your home loan?
The main benefit is certainty.
Knowing what your repayments will be for a set period can make it easier to manage household cash flow and plan around other financial commitments.
A fixed rate may also protect you from higher repayments if market interest rates rise during the fixed period. However, the reverse is also true. If interest rates fall, your fixed rate and repayments will generally remain unchanged until the fixed term ends.
Certainty can be valuable, but it should be considered within your broader financial position. The lowest advertised rate is not always the most suitable option if the loan does not provide the flexibility you may need later.
What are fixed rate break costs?
A break cost may apply if you change or end a fixed rate loan before the agreed period expires.
Depending on the terms of your loan, this could happen if you:
- Repay the loan early
- Refinance with another lender
- Switch to a different loan or interest rate
- Sell the property and discharge the loan
- Make additional repayments beyond the lender’s permitted limit
The rules and repayment limits vary between lenders and products, so it is important to read the relevant loan documents and fact sheets.
Break costs are generally linked to the lender’s estimated financial loss from ending the fixed arrangement early. ASIC notes that these fees are commonly calculated using the difference between the original fixed rate and prevailing rates, as well as the remaining fixed term.
As a general principle, a break cost may be higher when market rates have fallen since the loan was fixed. It may also be affected by how much of the fixed period remains and how much of the loan is being repaid.
Because these factors change, your lender may only be able to provide an accurate break cost quote at the time you are considering the change.
Can part of a home loan be fixed?
Some lenders allow you to split a home loan between fixed and variable portions.
This can provide some repayment certainty while retaining greater flexibility on the variable portion. For example, the variable portion may provide access to features such as additional repayments, redraw, or an offset account, depending on the product.
A split loan is not automatically the right answer. It still needs to suit your cash flow, plans, risk tolerance, and likely need for flexibility.
Is a fixed rate home loan right for you?
There is no single answer.
A fixed rate may appeal to someone who values predictable repayments and expects their circumstances to remain relatively stable. A variable rate may be more suitable for someone who wants greater flexibility or plans to make substantial additional repayments.
Before deciding, it is worth considering:
- How important repayment certainty is to you
- Whether you may sell or refinance during the fixed period
- Whether you expect to make additional repayments
- Which loan features you regularly use
- How the loan fits into your wider financial plans
The future direction of interest rates cannot be known with certainty. The more useful question is not simply whether rates might rise or fall, but whether the loan structure supports the life you are planning.
At You First, we look beyond the immediate interest rate and consider how lending, cash flow, tax, superannuation, business interests, and longer term goals work together.
If you would like to understand the fixed, variable, or split loan options available to you, we are always happy to start with a conversation.
The information in this article was accurate at the time of publication and is intended as general information only. It does not take into account your personal objectives, financial situation or needs. Laws, regulations and lending policies may change over time, so you should seek professional advice before making financial decisions.