Fixed Rate Home Loans Explained

A fixed rate home loan is a loan in which the interest rate on repayments stays the same for a set period of time. This is commonly anywhere from one to five years, meaning that the borrower knows exactly how much their monthly and annual repayments will be.

After the fixed rate period expires, a borrower’s entire loan may move to a variable rate or you may be able to negotiate another fixed rate term depending on the home loan provider.

Many Australian borrowers will be coming off their cheaper fixed-rate loans next year to discover a variable rates environment that is more expensive than the rate they were able to lock in before the RBA started raising the cost of borrowing.

Along with the certainty of the price of repayments, fixed rate home loans protect the mortgagor from any sudden increases in interest rates by the RBA. These interest rate increases have been especially prevalent as of late, as the central bank looks to curb inflation.

While those with fixed rates are not feeling the pressure from the recent increases, those with a different type of home loan (namely, variable rates) would be. And this could mean they end up entering mortgage stress territory.

However, the opposite is also true. If the RBA were to lower interest rates, those with a fixed rate home loan would still be required to pay their fixed rate of monthly repayments until the loan period concluded. Those with variable rates would benefit, as their rates would change alongside the RBA’s movement of the cash rate.

Along with the risk that a mortgagor would still have to pay the higher rate of repayments if interest rates were to fall, there are additional costs associated with a fixed rate mortgage.

These include a loan establishment fee or application fee, which is a one-off upfront cost to establish your loan and cover valuations or a bank’s legal fees; a rate lock fee, which is a fee to lock in the rate from the start of your application to your first repayment; and break fees or exit fees when choosing to refinance.

While a fixed rate doesn’t change over its fixed term, a variable rate home loan can move up and down as the lending market changes and if the lender chooses to increase or decrease the interest rate attached to the loan. This means the mortgagor is expected to pay repayments of varying prices, instead of a regular fixed fee.

Typically, a variable rate home loan is more flexible than a fixed rate, as it comes with features that may help mortgagors depending on their financial circumstances. This includes the option to make additional repayments, allowing your mortgage to be repaid sooner. Some variable loan lenders also have offset account options or redraw facilities. Fixed rates don’t offer this, meaning the loan cannot be paid off any quicker than the minimum term.

While a variable rate home loan is a popular choice, borrowers are encouraged to consider how their financial situation would fare in the case of significant and sudden increased rates.

Related: Mortgage Calculator

A split rate home loan is a hybrid loan, where the home loan is divided into multiple parts. It is also known as the ‘partly fixed loan’.

This is because a mortgagor can choose to have one portion of its home loan with a fixed interest rate, and the other portions may have a variable rate, both of which coexist at the same time.

A split rate home loan gives the mortgagor the benefits of both kinds of loans–but it also provides them with the risks, too.

Most lenders offer a one to five-year fixed rate on home loans. Some lenders can offer fixed rate periods of up to 10 years, although these are very rare circumstances.

For borrowers choosing longer periods, they are generally required to pay higher interest rates. This comes as a trade off for the fixed rate and certainty of the long-term agreement.

A long-term fixed rate home loan is when a loan has a fixed interest rate for a period longer than the standard duration, being the one to five year window that’s most common in Australia. As mentioned, it’s uncommon for lenders or banks to offer longer windows than this; however, if they did, it would be considered a long-term fixed rate loan or mortgage.

Longer term mortgage rates–of 20 or even 30 year fixed rates–are popular in the United States, and could soon be available in the UK market. According to The Guardian, the popularity of these long-term mortgages in the US came during the housing crisis that followed the GFC.

Whether the current economic climate will see Australian banks and lenders increase the length of their fixed-rate terms for borrowers remains yet to be seen.

1. Do your research and speak to a mortgage broker about what fixed rate and term period is best for your financial situation.
2. Compare various banks and lenders that offer loans suited to your needs. Speak to the banks about your options and find out if you are eligible .
3. Once you’ve decided on the most suitable mortgage provider, you can begin your application for your fixed rate home loan.