A Guide To Fixed Rate Home Loans

A fixed rate home loan is a safe option that protects you against rising interest rates. They typically offer lower lender fees than variable rate loans, and it’s easier to budget for repayments. 

Compare Club can help you find a best-fit fixed rate home loan that meets your needs, even while rates are rising. In fact, this is the best reason to lock in a lower rate for a year - or more.

What is a fixed rate term loan?

A fixed rate loan features a set interest rate for a predetermined period of your loan term. 

While the interest rate on a variable home fluctuates according to the official cash rate, a fixed rate loan retains the same set interest rate and is not subject to market movements. 

Is a fixed rate mortgage best?

Fixed rate mortgages are a little safer than other options. While you may pay a slightly higher interest rate when the official cash rate is low, you are protected from interest rate increases during the fixed rate period of your loan. 

This means you know how much your monthly interest payments will be, which makes it easier to budget around your fixed rate mortgage. 

Is it better to have a fixed or variable loan?

That depends on what the official cash rate is and what your needs are. The official cash rate is currently 4.35% (as of September, 2024), which means variable interest rates are typically a little lower than one year fixed interest rates, but other fixed rate terms may offer you lower rates. 

However, while variable rate loans tend to offer more features, they may attract higher lender fees than fixed interest rate loans. On the other hand, some fixed interest loans apply a break fee if you want to switch loan providers, which can make refinancing a fixed interest loan more expensive.

How do lenders calculate fixed rates?

Lenders calculate fixed rates home loans based on your loan amount, bond rates (the interest rate on the money they have invested), and their forecasted bond investment earnings. 

This is to cover the possible costs and losses over your mortgage. After determining your fixed rate, a lender will usually ask you to make your repayments according to their monthly fixed amount.

What are the cons of a fixed rate loan?

The downsides of choosing a fixed rate loan include:

• Having a certain fixed rate term (the term will usually last 1-5 years of your overall mortgage term).

• Capped extra repayments.

• Difficulty and additional costs with changing your loan later down the road.

• Limited home loan features (fixed rate loans usually do not offer offset accounts or redraw facilities).

• Not benefiting from potential falling interest rates.

Should I go for a fixed or floating home loan?

A floating home loan is another name for a variable rate loan. That means your interest rate will rise and fall in accordance with the official cash rate, and your lender's decisions. 

Just like a variable loan, a floating rate home loan tends to offer more flexibility to refinance and may come with other benefits such as unlimited redraws on early repayments. 

What does fixed interest rate mean?

Fixed interest rate means that the interest rate you pay on your home loan cannot be changed during the fixed rate period of your loan. 

Most lenders offer one, two, three, or five year fixed interest periods on fixed rate loans. After the fixed interest period expires, fixed rate interest loans typically revert to a variable interest rate. 

How long is a fixed rate loan term?

A fixed rate loan term usually ranges from one to five years. They can only be partially applied to a home mortgage, as most mortgage terms are 25 or 30 years. 

This means you should carefully consider the length of your fixed rate loan term against the term of your mortgage when forecasting your repayments, as it is more than likely you will switch to a variable rate for the lion’s share of your loan period.

What is the longest fixed rate mortgage?

Lenders most commonly offer one, two, three and five year fixed interest terms. However, a few lenders offer 10 year fixed interest terms. Some lenders also allow you to extend your fixed rate period after it expires. 

While fixed interest rates vary between lenders, keep in mind that longer fixed interest periods may attract higher interest rates. 

Is a two year or five year fixed rate mortgage better?

That all depends on the economic outlook at the time you take out your loan. That is, if you think the official cash rate is likely to go up within the first two years of your loan, a two-year fixed rate mortgage could be your best option. 

However, if you think the official cash rate is likely to keep rising throughout the first five years of the loan period, then a five-year fixed rate mortgage could save you money. 

Can you pay off a fixed rate loan early?

While in most cases it is possible to pay off a fixed rate loan early, you may incur an early repayment fee. An exit, discharge or break fee may be payable if your loan is closed during the fixed interest period. 

Carefully check the terms and conditions of your loan agreement to ensure you're aware of any early repayment fees your lender may charge. Lenders are not allowed to charge early repayment fees on variable rate loans. 

How does a fixed rate mortgage work?

The monthly interest payments on a fixed rate mortgage will be calculated on the same interest rate for the fixed period of the loan. 

After that, fixed rate loans typically revert to a variable interest rate that is based on the current official cash rate. You may also need to pay any lender fees that apply.

How long can I fix a home loan rate for?

Lenders typically offer one, two, three and five year fixed interest terms. Some lenders may offer up to 10 year fixed interest terms, however interest rates on these are typically a little higher. 

Depending on the conditions of your fixed home loan, your lender may allow you to extend the fixed interest period on an existing fixed home loan. 

But, again, always carefully check the terms and conditions of your loan to ensure you understand what your lender allows. 

Can a broker get a better fixed rate from a bank?

Banks and lenders compete for your business and offer a range of home loan deals and special features. Brokers work on your behalf to help you cut through the confusion and find the best deal available to you. 

Compare Club makes this process simple. We’ll look across 50 lenders to find the best deal on the right home loan for your particular needs.

Are fixed rates cheaper than variable loans?

That depends largely on the current official cash rate. When the official cash rate is low, the interest payable on a variable loan is typically less than on a fixed rate loan. 

However, as the official cash rate increases, so does the interest payable on a variable loan and it can exceed the interest payable on a fixed rate loan that doesn’t rise and fall with the official cash rate. 

What is a split rate loan?

With a split rate loan, you essentially split your mortgage into two separate loans — one with a fixed interest rate, and the other with a variable interest rate. This provides the best of both worlds. 

Part of your home loan is protected from interest rate rises with a fixed rate, and the other portion benefits from interest rate decreases with a variable rate. 

However, not all home loans are eligible to be split. Check with your lender to confirm which of their home loans can be split. Or your broker can do this for you.

How do I find the best fixed rate home loan? 

Finding the best fixed rate home loan for your needs is easy with Compare Club. 

We’ll examine home loan products from 50 of Australia’s leading lenders to find the best home loan for you.

A fixed rate home loan can be a great option to protect you against interest rate increases. But finding the right one for you from the hundreds on the market can be difficult. 

Compare Club makes it simple. We can show you how much you could save when you apply for a mortgage through our extensive lending panel.

Anthony Stevenson, is the head of home loans at Compare Club. With over a decade of experience under his belt, Anthony is dedicated to helping individuals make informed decisions when choosing a home loan. Whether it's finding a great deal on your home loan or refinancing, Anthony has a wealth of knowledge in the space.

Meet our home loans expert, Anthony Stevenson

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  Home loan pre-approval is not compulsory. It’s possible to begin your home loan application after you’ve found the home you want to buy.