What is a fixed rate home loan?
A fixed rate home loan is a home loan where the interest rate is locked in or ‘set’ for a certain period of time, otherwise known as the fixed term of the loan. This means that, over this initial period, the interest rate you pay will remain the same.
A fixed rate home loan is an alternative option to a variable rate home loan. A variable rate is different, in that it will change over time, with lenders typically moving their rates up or down in line with the cash rate set by the Reserve Bank of Australia (RBA) and other market conditions.
It is also possible to combine a fixed and variable rate loan into what’s called a split home loan, which has features of both. If you wish, you can also take out an interest only loan, in which only the interest portion will be payable for a set period of time.
How do lenders calculate fixed rates?
When banks and other lenders set a fixed interest rate, they will generally do so while keeping in mind the current cash rate set by the RBA, and any possible future fluctuations, as well as market conditions, such as how much it costs them to borrow money ‘wholesale’. The price of a fixed rate loan will have these possible rises and falls factored in.
Lenders will typically keep these fluctuations in mind when setting a fixed rate. If they expect the cash rate or wholesale borrowing rates to fall over the term of the loan, for example, then their fixed rates might be priced more cheaply than variable rate loan products, and the reverse is also true.
How long is a fixed rate loan term?
The term of a fixed rate home loan will vary, depending on your needs and what your lender is willing to offer, but typically, the fixed term will last for between one and five years. After this, the interest rate will switch to a variable one, or in some cases you may be able to negotiate another fixed term with your lender.
What are the advantages and drawbacks of a fixed rate home loan?
While fixed rate home loans can offer you certainty in terms of your budget, and can be cheaper than other types, they tend to lack the features that variable loans have, and you will not save money if interest rates go down.
- If you want the certainty of knowing exactly how much your monthly repayments will be for at least the first few years of your loan, a fixed rate loan can offer this, as you will know the precise amount you’ll owe each month, meaning budgeting may be easier.
- If your lender chooses to put its rates up, increasing the interest payable on variable rate loans, your repayments on a fixed rate home loan will not be affected, and will remain the same.
- If you want a home loan product without too many bells and whistles and potentially a cheaper rate, then a fixed rate loan may be appropriate, as it comes without features such as offset accounts and flexible repayments that are more common with variable rate loans.
- The fact that your repayments remain the same month to month means that you will not save on interest if the lender decides to put its rates down, as you potentially could with a variable rate home loan.
- Fixed rate loans lack flexibility, and in many cases you will not be able to make additional monthly repayments without being charged a fee. Similarly, they generally lack features such as an offset account. However, even if you choose a fixed rate loan it can be worthwhile checking with the lender for its policy on repayments and whether it offers any features such as a redraw facility.
- If you choose to refinance or switch loans from a fixed rate loan, or end your contract (perhaps due to selling your house), then you will typically be charged a break fee by your lender.
If you’re curious about the latest home loan rates, you can compare home loans now with Canstar to see who may be able to offer you a deal that suits your particular needs, and consider our list of Award-winning fixed rate home loan providers.
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