Fixed Rate Home Loans

Fixed rate home loans are one of two broad product categories offered by home loan lenders. Variable rate home loans are the other. It is important for borrowers to understand the fundamental differences between these two types of home loans and the comparative advantages and disadvantages of each.

What are fixed rate home loans?

A fixed home loan interest rate stays the same for a defined period of time, usually 1-5 years.At the end of the fixed term, borrowers have the option to choose another fixed term. Alternatively, the loan may automatically convert to the lender's current variable rate, which can move up or down based on market conditions.

It's possible for fixed home loan rates to be higher or lower than the variable interest rates on offer in the market. For example, if the fixed rates are lower, it's a sign that lenders believe that the variable rates will fall further in the future, and vice versa.

There are a two broad types of fixed home loan products on the market:

A standard fixed interest home loan. This is where the rate for a time period is agreed when the loan is accepted. It is applied to the full loan balance and cannot change during the set period.
A split home loan. This is where the fixed interest rate is applied to part of the loan balance and variable to the remainder. The borrower can usually decide the loan split proportions (e.g. 50/50, 60/40, 70/30 etc.).

There are also two common variations on fixed home loan products:

Some lenders offer fixed 'honeymoon' periods where they will provide a discount on their variable interest rate for a short time period.
Capped home loans. These are semi-fixed home loans where the interest rate cannot rise above an agreed cap. However, it can fall, which benefits the borrower.

When comparing different home loan products, it is important to be aware of the comparison rate. Two interest rates are typically advertised on a loan product: nominal and comparison. The comparison rate is the higher of the two and provides the total cost of the loan. It includes both interest and all associated loan fees/charges.

Under the National Credit Code in Australia, lenders are legally required to provide borrowers with the comparison interest rate on their products. This allows you to compare the actual total costs of different loan products.

What are the pros and cons of a fixed rate home loan?

Fixed home loans have both advantages and disadvantages, just as variable loans do. Whether they're a good option depends on:

The borrower's personal financial circumstances.
Future interest rate movements, which are influenced by changing economic conditions.
The borrower's personality, as they can provide peace of mind as a benefit.

The advantages of a fixed home loan:

If variable interest rates go up, the borrower's repayments don't change for the duration of the fixed term. They will be paying less interest than a borrower with a variable loan.
Borrowers can therefore budget with more confidence. This can be especially useful at certain times of life (for example, when borrowers are starting a family).

The disadvantages:

If variable interest rates go down, fixed home loan borrowers will be paying more interest than borrowers with a variable loan for the same amount.
Fixed home loans usually have higher fees than a variable loan.
If borrowers want to change their loan before the fixed interest period expires (for example, to change to a lower variable rate or to sell their home), there will usually be 'loan break' fees involved.
Some fixed interest loans limit the borrower's ability to make additional repayments. They often also don't have potentially useful additional features such as a redraw facility. A redraw facility allows borrowers to withdraw the extra repayments they've made on their home loan.

See if a fixed rate home loan is right for you by using our range of home loan calculators to get a better feel for your finances.

Should you go with a full versus split fixed home loan?

There's no simple answer to this question. Whether a borrower will be financially better off depends on interest rate movements. Unfortunately, no-one has a crystal ball to predict these future movements. However, a split loan is a compromise alternative that allows borrowers to have some flexibility with some security.

Who do fixed rate home loans suit?

Fixed home loans can be a good option for new borrowers that need the certainty of knowing what their repayments will be for a defined period.

What are fixed home loan rates likely to be in the future?

Home loan interest rates are currently at record low levels in the Australian lending market. Although future movements cannot be predicted with any certainty, many financial analysts are forecasting that they will inevitably rise. That has been a pattern throughout history as economic conditions invariably change.

The bottom line

Taking out a home loan is a major financial decision. The market is highly competitive and there is a vast range of products on offer. It is worthwhile for borrowers to seek professional advice to secure the most appropriate home loan for their individual circumstances.

If you're interested in a fixed rate home loan book an appointment to speak with one of our home loan specialists. Or start to compare home loans online.