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Fixed Rate Home Loan

A Fixed Rate Home Loan is a home loan that has an interest rate that is fixed for an agreed period, usually between 1 and 5 years. During this fixed period your interest rate and home loan repayments stay the same, which provides a degree of financial certainty and can make budgeting to make the repayments easier as each and every month for the fix period you will know what the repayment amount is.

Fixed Rate Home Loans are offered by many of the major lenders with the option to fix your interest rate for up to 10 years, though the most popular period with Australian borrowers is 3 years.

When considering the option of a Fixed Rate Home Loan it is important to include research on interest rate rise and falls, in conjunction with an assessment of the features offered across fixed rate home loans.

In terms of interest rates if you opt to fix your rate before an interest rate increase then you could enjoy lower fixed rates while the variable rates rise. Conversely, if the interest rate falls during your fixed rate period your rate will remain at the fixed level and so you will miss out on any benefit from this rate fall, and may end up paying interest at a higher rate than those on a variable rate home loan.

The features included with home loans differ between lenders and loan types. Historically Variable Rate Home Loans have always had more features and flexibility than fixed rate home loans though recently a number of Fixed Rate Home Loans have been launched that include features and flexibility that can help you pay off your home loan faster, such as extra repayments and redraw facilities. Be sure to check the terms and conditions of these features, as they do tend to include restrictions and come at cost, with the lenders charging hefty fees to access them.

At the end of your fixed period, you have the choice to either commit to a further fixed rate period with a renegotiated fixed rate, switch over to a Variable Rate Home Loan or refinance your loan with another lender.

Compare Fixed Rate Home Loans

Fixed rate home loans are popular with borrowers for who are seeking certainty about their home loan repayments and who prefer to manage their income and expenditure to a budget where the costs are predictable. This certainty and ease of budgeting does come at a cost as fixed rate home loans have less flexible features that may prohibit you from accelerating the speed at which you repay your mortgage or provide access to any additional repayments you may have made.

What are the advantages of a fixed rate home loan?

Your repayments will remain the same, regardless of any movements in the interest rates.
Budgeting is to make your home loan repayments is, as your repayments will remain the same across the fixed period.

What are the disadvantages of a fixed rate home loan?

Your home loan repayments will stay the same, even when interest rates go down.
Making additional payments on your loan may attract a charge and any additional payments you make may not be accessible to redraw during the fixed period.
It is likely that you will incur penalty fees if you choose to exit the loan prior to the end of the fixed period.

What features are available with fixed rate home loans?

Fixed Rate Home Loans, until recently, tended not to include any features designed to borrowers repay of their loan faster or minimize their interest charges. As the market has become more competitive borrowers have gradually began to include more features on fixed rate home loans, though these features generally attract a fee.

Extra repayments - This popular feature has been borrowed from the variable rate home loan, though when offered on a fixed rate home loan it tends to includes a maximum amount which can be repaid as extra repayments each year of the fixed period.

Redraw facility - having made extra repayments the redraw facility enables you to access these funds and redraw them from your home loan account. Where this facility is offered on fixed rate home loans it usually attracts a fee and includes a minimum value that you are able to redraw at any time.

Offset account - These are offered by a limited number of fixed rate home loan providers though the percentage that you will be able to off set will be in the region of 10-40% on the loan, which is significantly different to the 100% which is available on some variable rate home loans.

Repayment flexibility - Fixed rate home loans offer the same options as variable rate home loans so you can synch your income steams with your repayments, options include weekly, fortnightly and monthly repayments.

Loan-to-Value ratio - LVR requirements for fixed Rate Home Loans tend to be higher than variable rate loans so while you might need an LVR of 75% for a variable rate loan you may only need a LVR of 85% for a fixed term loan.

Split loan - An increasing number of fixed rate home loans include the option of splitting a portion of the fixed loan with a variable rate. There are generally some limits to how much you can split of the home loan, but this splitting of the loan can deliver the benefits of rate certainty for the fixed portion of your loan and added flexibility on the variable.

What happens if interest rates increase or decrease?

If you have a variable rate loan and interest rates rise or fall, your lender will recalculate your minimum repayment based on the new rate. Your lender will generally write to you to advise your new minimum repayment. If you have a fixed rate loan, your rate and repayments will not change during the period of the fixed rate agreement.

How are Home Loan Interest rates set by the lenders?

There are a range of factors home loan lenders consider when setting their interest rates.

One of the most influential of these is the ‘cash-rate’, which is set by the Reserve Bank of Australia (RBA). Part of the RBA’s role is to control inflation, economic growth and employment, and it does this by setting the ‘official cash rate’, which is the interest rate Australian banks are required to pay the RBA for short-term loans. When the RBA increases or decreases the ‘cash-rate’, lenders typically pass this on to customers in the form of higher or lower interest rates.

Other factors include the interest rate banks pay savers for deposits and the amount they pay overseas and other financial institutions to borrow money.

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

Fixed Rate Home Loans have interest rates and loan repayments that remain the same for an agreed period of time (the fixed period), and then at the end of the term, reverts to a variable rate.

A Variable Rate Home Loan has an interest rate that can move up and down according to fluctuations in the housing market. You should consider a fixed rate if you want the certainty of knowing what your repayments will be and therefore help you budget, not to try and “beat the market” as breaking out of a fixed rate (fixed term) loan contract could cost you thousands of dollars.

What is a mortgage off set account?

An offset account is a separate savings account where the balance is offset daily against your home loan amount. For example, if you have $10,000 in your offset account, 'notional' interest is earned on these funds, at the same interest rate as your linked home loan. This 'notional' interest is offset against the interest payable on the home loan.

So for example, if you have a Home Loan with $300,000 owing and a saving account with a credit balance of $40,000, in effect, you will only pay interest on your home loan on a notional balance of $260,000.

My partner and I are both eligible for the First Home Owner Grant, does this enable us to receive it twice?

The First Home Owner Grant is payable per property purchase, not per individual. So if you are both eligible for the Grant and you purchase your first home together, you will only receive one payment.

What is a Split Rate Home Loan?

A split rate home loan or combination loan brings together the benefits of variable and fixed interest rates into a single home loan. This can be an attractive feature as it allows you to customise the loan and potentially reduce the effect of interest rate changes.

The home loan can be split in many ways however 60% variable and 40% fixed or 50/50 splits are the most common. If you are seeking the security of a fixed rate home loan but want the flexibility of a variable rate loan, a split loan should certainly be on your consideration list.