The short version
- A fixed rate locks your rate for one to five years, then reverts to variable.
- You're protected if rates rise, but break fees can apply if you sell or refinance.
- Check what the rate reverts to when the fixed term ends.
Fixed rates are for a set time
A fixed rate can suit you when you're getting used to a new loan, especially your first, and want certainty about your repayments. Most fixed rates run for 1 to 5 years. When the fixed term ends, the loan rolls onto the lender's variable rate, which is often higher than the rate offered to new customers, so check and compare when your fixed term is ending.
Pros
- Your repayments stay the same, which makes budgeting easier.
- You're protected if rates rise.
Cons
- You miss out if rates fall.
- Extra repayments are often capped, commonly at $10,000 to $30,000 a year, and some fixed loans don't allow them at all.
- Breaking the loan early, to sell or refinance, can mean a break fee.
- Offset accounts and redraw are less common on fixed loans, and switching fees can be higher.
How variable rates compare
- Variable loans usually let you make extra repayments and pay less interest overall.
- They're more likely to come with redraw and an offset account.
- Refinancing a variable loan is usually simpler and cheaper.
- Repayments fall when rates fall, but can rise at any time, which is hard if your budget is already tight.
How long to fix
Most people fix for one to five years, even though the loan itself runs 25 or 30 years. A few lenders offer longer fixed terms, but get advice before locking in for that long; you can usually fix again when your first term ends.
If you have money left over after repayments while you're fixed, keep it in a savings account as a buffer, or in an offset account if your loan has one.
Splitting the loan
Fixing part of the loan and keeping the rest variable gives you some certainty while keeping features like offset and extra repayments on the variable part.
Alternatives
- A variable rate home loan, with more features and no break fees.
- A split loan, with part fixed and part variable.
- Refinancing your current loan, if you already own a home. A lower rate on your existing loan can save more than a new product.
How to apply
Most people get pre-approval for a fixed rate home loan before they start making offers, then the full approval once they've found a home.
- Get your documents together. Payslips, two years of tax returns if you're self-employed, bank statements showing your savings, and details of your debts and credit limits.
- Get pre-approval. It tells you how much you can borrow and shows sellers you're serious. It usually lasts three to six months.
- Find the home and sign the contract. The lender then values the property before it gives full approval.
- Settle. Your lender pays the seller, and your repayments start about a month later.
- Ask about a rate lock. For a fee, some lenders hold the fixed rate until settlement.
What to compare
Start with the rate for your situation: the rate a lender offers depends on whether you'll live in the home or rent it out, how you repay, and the size of your deposit. The comparison above picks each lender's rate for your choices.
Then look past the rate.
- Fees: upfront fees, and annual package fees that often come with an offset account.
- Features: an offset account, redraw, extra repayments and the option to split the loan between fixed and variable.
- The comparison rate, which adds standard fees to the rate for an example loan of $150,000 over 25 years.
- Any cashback, but only after the rate and fees, since a higher rate can cost far more over the life of the loan.