The best 3-year fixed home loans

ALASDAIR DUNCAN
There’s more to buying a home than just choosing the right property –- there’s also the matter of how to structure your loan, which will likely dictate how you make your repayments for years to come. As a buyer, one potential option would be to fix your new home loan rate for three years, and if you’re pondering this, we’ll consider the pros and cons, and some other key questions around fixed rate home loans.

When you purchase a new property and take out a home loan, there are generally three categories to choose from:

  • Fixed rate home loans: This option means that you will lock in or ‘fix’ your home loan for a set period of time, during which time your interest payments will not change.
  • Variable rate home loans: This option means that your home loan rate will be changeable, and your interest payments could fluctuate up and down.
  • Split home loans: This option means combining a fixed rate with a variable one, and splitting the percentages in a way that’s appropriate for your needs.

If you want to lock in a steady interest rate for the first few years of your mortgage, then one option might be to choose a three-year fixed rate home loan.

What is a 3-year fixed home loan?

A three-year fixed rate home loan is one in which the interest rate you’ll pay is locked in place or ‘fixed’ for a period of three years, usually from the start of the loan. This means that throughout this entire three-year period, your required repayments will remain consistent, rather than potentially fluctuating up or down as they might with a variable rate.

What are potential advantages of a 3-year fixed home loan?

There can be a number of possible benefits you could see from locking in an interest rate, whether you choose to do it for three years or another length of time. These include:

  • A sense of certainty in your repayments: With a three-year fixed rate, your repayments will remain the same from month to month for the whole period, meaning you won’t get any surprises if interest rates go up, and you’ll be able to budget for your other needs and expenses knowing exactly how much your mortgage will cost. In addition to the interest rate, it may be a good idea to consider the comparison rate in working out what you may be able to afford in repayments.
  • The potential to save money on fees and charges: Variable rate loans come with added features like offset accounts and redraw facilities, and while these features are useful, they can make a loan more expensive. If you don’t fancy the bells and whistles or feel like you could do without them, fixing your loan could mean you pay less in fees and charges.

What are potential drawbacks of a 3-year fixed home loan?

If you want the security of locking in a favourable interest rate for three years, there are a number of potential trade-offs you might have to make. These include:

  • A lack of features: If you would like to use your home loan account as an everyday banking account, or maintain a redraw balance to help lower your interest rate, then you typically won’t be able to do this on a fixed rate loan, as these features are typically only available with variable rate home loans. If you do want to have features like these on a fixed rate loan, you may need to pay additional fees to access them, depending on your lender.
  • The potential to miss out on a lower interest rate: When you lock your rate in, your repayments will not change if interest rates rise, but you will also not benefit if interest rates fall.
  • Inability to make additional repayments: One feature common to variable rate home loans is the ability to make additional repayments above and beyond what you owe each month, in order to bring down the balance of the loan. Fixed rate loans generally do not allow this, meaning you cannot usually do much to bring down the balance of your loan faster. However, this can vary depending on your lender and home loan product.

Can you break a 3-year fixed home loan?

Depending on the terms and conditions of a fixed home loan, it may be possible to break it before the loan term is up. Whether you want to refinance your loan to take advantage of a better rate, are selling your house or if circumstances have changed, you may be able to get out of a fixed rate loan, but it could be expensive.

If your contract allows you to exit from your loan early, it’s likely that you will be charged a ‘break cost’ or a ‘break fee’. Lenders charge this amount as a form of compensation for lost profits that they may face as a result of borrowers breaking loans. While there is no set amount for break fees, they generally take into account the fixed interest rate (relative to current interest rates), the amount of time left on the loan, and the amount of the loan itself. How long can you fix a home loan for?

There is a good deal of flexibility in how long you can fix a home loan – lenders will typically allow you to do it for a shorter period of one, two or three years, or a longer one of up to five or even 10 years. The length of time you choose to lock in your interest rate will ultimately be a matter of discussion between you and your lender, considering what they are willing to offer and how long you want to lock your rate in for.

When is your interest rate locked in?

If you are considering locking in your home loan interest rate for three years, it is important to keep in mind that the interest rate will be set on the day you settle on the property, not the date you applied. Interest rates could fluctuate in this period, so you could theoretically end up locked in at a different rate than the one you were anticipating for the three-year term.

There are ways around this, however. If you want the certainty of fixing the exact rate you want, some lenders will offer you the ability to lock in a rate before settlement, but you may be asked to pay a lock-in fee to guarantee it, and the availability of this feature will depend on the individual lender and the home loan product you apply for.

What happens when your fixed loan term ends?

Generally speaking, when a three-year fixed term (or any fixed term) ends, you will have several options. You could:

  • revert to a variable rate for the remainder of your home loan
  • refinance with your current lender to lock in a new fixed rate, or even a split rate home loan, with a fixed and variable component
  • refinance your loan with a new lender, choosing either a fixed or variable rate, or a split rate combining the two.

Which lenders have the lowest fixed-rate home loans?

If you’re contemplating a three-year fixed rate home loan, you can compare home loans with Canstar to find a lender with a low rate that is suitable for your particular needs. You can also take a look at the winners of Canstar’s Fixed Rate Home Loan Awards to find out which lenders can offer value for money to Australian home buyers.

Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD.

Cover image source: bbernard/Shutterstock.com.


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