The best 5-year fixed home loans

ALASDAIR DUNCAN
When choosing a home loan that suits your needs, a five-year fixed rate is one potential option. Setting your home loan rate for five years can allow you to avoid interest rate changes throughout that time, but you may be concerned about what it means to be locked into the one rate for this long. If you’re contemplating a five-year fixed rate loan, we’ll consider the pros and cons, and answer some other key questions on the topic.

There’s more to buying a home than just choosing the right property – there’s also the question of how to structure your loan. Generally speaking, there are three types of home loan rates available. A fixed rate will see your interest payments remain steady for a set period of time, while a variable rate could see them go up and down. A split rate, on the other hand, can allow you to combine the two at a percentage split that’s appropriate for your needs.

If you want to lock in a steady home loan interest rate for the medium term, then one option might be to choose a five-year fixed rate home loan.

What is a 5-year fixed home loan?

A five-year fixed rate home loan is one in which the interest rate you’ll pay on the balance of the loan is locked in place or ‘fixed’ for a period of five years. This means that, throughout the entire five-year term, the interest rate will remain the same, and you will be guaranteed that it will not fluctuate, as it would with a variable rate loan.

It is possible to lock in a home loan rate in for a shorter or longer period of time, depending on your preference and what your lender is willing to offer. For example, you may only wish to fix your rate for a comparatively short period of one, two or three years. Alternatively, if you are happy with your rate, you may choose to lock it in for five or even 10 years.

What are potential advantages of a 5-year fixed home loan?

There can be a number of possible benefits you could see from locking in an interest rate for five years. These include:

  • Protection from interest rate rises: With a five-year fixed rate, your repayments will remain the same from month to month for the whole five-year period. This means that you will be protected from interest rate rises, for that period, and if your lender raises interest rates significantly on the home loan you have, you will still be paying a lower rate.
  • A sense of certainty in your repayments: Along with protection from interest rate rises comes a certainty in your repayments. Knowing that you will be paying the same interest rate on your home loan for five years can give you the ability to budget for other needs and expenses, while knowing exactly how much your mortgage will cost. Keep in mind the comparison rate on a home loan product will combine the interest rate with most fees and charges, to give you a more accurate cost of the loan overall.
  • The potential to save on fees and charges: Variable rate loans come with added features such as offset accounts and redraw facilities. While these may be appealing, they can also make a loan more expensive, so if you are happy without these extras, a five-year fixed loan could include fewer  fees and charges.

What are potential drawbacks of a 5-year fixed home loan?

While locking in an interest rate for five years can give you a sense of security in your repayments, there are a number of possible downsides to consider, including:

  • A lack of features: The features of a variable rate home loan can be appealing. For example, you can use an offset account to lower the balance of your home loan, while having access to your funds for everyday banking. If you do want to have features like this on a fixed rate loan, some lenders may offer them at an extra cost, but with a fixed rate loan, you may feel you are missing out on added features.
  • The potential to miss out on a lower interest rate: When you lock your rate in, you will be protected from interest rate rises, but conversely, you will also miss out if interest rates fall.
  • Inability to make additional repayments: In general, variable rate home loans are structured in a way that allows you to make extra repayments, bringing down the balance of the loan and reducing the interest you pay. Fixed rate loans generally do not come with this feature, and if they do, it will usually come at an extra cost.

Can you break a 5-year fixed home loan?

Generally speaking, it is possible to break a fixed home loan, though this will depend on the specific terms and conditions of the home loan product you take out. 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 generally 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.

What happens when your fixed loan term ends?

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

  • revert to a variable rate with your current lender
  • refinance with your current lender or a new lender at a new fixed rate
  • refinance with your current lender or a new lender at a split rate
  • refinance with a new lender at a variable rate

Which lenders have the lowest fixed-rate home loans?

If you’re contemplating a five-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: Monkey Business Images/Shutterstock.com.


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