Buying a home is a big decision, and one that will affect your finances significantly. As more and more Australians invest in property, it’s important to understand the commitment you are undertaking before purchasing a property yourself.
When looking for a home loan—or a mortgage—there are many factors to consider. These include the type of loan, the length of the loan, and interest rates.
A popular type of home loan is a fixed rate mortgage. Here’s what that means.
What is a Fixed Rate Home Loan?
A fixed rate home loan is a loan in which the interest rate on repayments stays the same for a set period of time. This is commonly anywhere from one to five years, meaning that the borrower knows exactly how much their monthly and annual repayments will be.
After the fixed rate period expires, a borrower’s entire loan may move to a variable rate or you may be able to negotiate another fixed rate term depending on the home loan provider.
Many Australian borrowers will be coming off their cheaper fixed-rate loans next year to discover a variable rates environment that is more expensive than the rate they were able to lock in before the RBA started raising the cost of borrowing.
The Benefits of a Fixed Rate Home Loan
Along with the certainty of the price of repayments, fixed rate home loans protect the mortgagor from any sudden increases in interest rates by the RBA. These interest rate increases have been especially prevalent as of late, as the central bank looks to curb inflation.
While those with fixed rates are not feeling the pressure from the recent increases, those with a different type of home loan (namely, variable rates) would be. And this could mean they end up entering mortgage stress territory.
However, the opposite is also true. If the RBA were to lower interest rates, those with a fixed rate home loan would still be required to pay their fixed rate of monthly repayments until the loan period concluded. Those with variable rates would benefit, as their rates would change alongside the RBA’s movement of the cash rate.
Fixed Rate Mortgage Fees
Along with the risk that a mortgagor would still have to pay the higher rate of repayments if interest rates were to fall, there are additional costs associated with a fixed rate mortgage.
These include a loan establishment fee or application fee, which is a one-off upfront cost to establish your loan and cover valuations or a bank’s legal fees; a rate lock fee, which is a fee to lock in the rate from the start of your application to your first repayment; and break fees or exit fees when choosing to refinance.
Fixed vs Variable Rate Home Loans
While a fixed rate doesn’t change over its fixed term, a variable rate home loan can move up and down as the lending market changes and if the lender chooses to increase or decrease the interest rate attached to the loan. This means the mortgagor is expected to pay repayments of varying prices, instead of a regular fixed fee.
Typically, a variable rate home loan is more flexible than a fixed rate, as it comes with features that may help mortgagors depending on their financial circ*mstances. This includes the option to make additional repayments, allowing your mortgage to be repaid sooner. Some variable loan lenders also have offset account options or redraw facilities. Fixed rates don’t offer this, meaning the loan cannot be paid off any quicker than the minimum term.
While a variable rate home loan is a popular choice, borrowers are encouraged to consider how their financial situation would fare in the case of significant and sudden increased rates.
Related: Mortgage Calculator
What Is a Split Rate Home Loan?
A split rate home loan is a hybrid loan, where the home loan is divided into multiple parts. It is also known as the ‘partly fixed loan’.
This is because a mortgagor can choose to have one portion of its home loan with a fixed interest rate, and the other portions may have a variable rate, both of which coexist at the same time.
A split rate home loan gives the mortgagor the benefits of both kinds of loans–but it also provides them with the risks, too.
How Long Can you Fix a Home Loan Rate For?
Most lenders offer a one to five-year fixed rate on home loans. Some lenders can offer fixed rate periods of up to 10 years, although these are very rare circ*mstances.
For borrowers choosing longer periods, they are generally required to pay higher interest rates. This comes as a trade off for the fixed rate and certainty of the long-term agreement.
Is a Long-Term Fixed Home Loan Better?
A long-term fixed rate home loan is when a loan has a fixed interest rate for a period longer than the standard duration, being the one to five year window that’s most common in Australia. As mentioned, it’s uncommon for lenders or banks to offer longer windows than this; however, if they did, it would be considered a long-term fixed rate loan or mortgage.
Longer term mortgage rates–of 20 or even 30 year fixed rates–are popular in the United States, and could soon be available in the UK market. According to The Guardian, the popularity of these long-term mortgages in the US came during the housing crisis that followed the GFC.
Whether the current economic climate will see Australian banks and lenders increase the length of their fixed-rate terms for borrowers remains yet to be seen.
How to Apply for a Fixed Rate Home Loan
- Do your research and speak to a mortgage broker about what fixed rate and term period is best for your financial situation.
- Compare various banks and lenders that offer loans suited to your needs. Speak to the banks about your options and find out if you are eligible .
- Once you’ve decided on the most suitable mortgage provider, you can begin your application for your fixed rate home loan.
Frequently Asked Questions (FAQs)
Is a fixed rate loan better?
A fixed rate is common for many home first buyers, as it provides certainty to their household budget due to the unwavering price of the repayments. However, it may not be the best option for your personal mortgage needs as it does not allow for additional repayments to be made, and doesn’t change if the RBA decreases interest rates.
It is always best to speak to a mortgage specialist to decide what type of home loan is best for your financial situation.
What is the current fixed rate for mortgages?
There is no centralised figure for fixed rates in Australia. Instead, banks and lenders provide their own rates and terms depending on their offerings and your total loan cost.
According to the ABC, following the RBA’s successive interest rate rises, some Australian banks actually chose to slash their fixed-rate home loans to lower figures–especially for four-year terms.
“Both CBA and Westpac slashed their four-year loans to 4.99 per cent. In CBA’s case, that lopped around 1.6 percentage points off its previous level so that it now sits well below the variable rate of 5.8 %,” the ABC reported in August.
