A home is likely to be one of the biggest asset purchases you will ever make in your lifetime, so it can certainly pay off to make the right decision when it comes to choosing between a fixed-rate and variable rate home loan.
Many borrowers are attracted to the certainty a fixed-rate home loan offers - even I took out a 2-year fixed rate when I bought my first home. In mid-2021, new fixed-rate home loans peaked at more than half of the market, but have since dithered to fewer than one-in-10 home loans written in any given month.
Fixing the mortgage can be a viable option for those who want to insulate themselves from any possible interest rate rises. But, there are also some instances where a fixed-rate may not be the right option.
This may get you wondering - should I fix my home loan?
Here, we look at what it means to fix your home loan, the pros and cons, whether fixing is worth it, and also some alternative options to fixed-rates.
See Also: Fixed vs variable rate home loans
What is a fixed-rate home loan?
When you sign up for a fixed-rate home loan, you and your lender are agreeing that your interest rate will be ‘locked in’ for an agreed period of time - usually between one and five years. Some lenders offer fixed rates up to seven or even 10 years.
This means the interest rate cannot fluctuate during the fixed-term - you are protected and your monthly repayments remain the same. This can provide a borrower a sense of security and certainty as they can budget accordingly.
RACQ Bank – Fixed Rate Home Loan (QLD only) (Principal and Interest) 3 Years (LVR < 60%)
Arab Bank Australia – Fixed Rate Home Loan 1 Year (LVR <60%)
Australian Mutual Bank – Special First Home Buyer Fixed Home Loan (Principal and Interest) 2 Years
IMB Bank – Fixed Rate Home Loan (Principal and Interest) 3 Years (LVR ≤ 80%)
Newcastle Permanent – Premium Plus Package Fixed Rate Home Loan Special (Principal and Interest) 2 Years
Illawarra Credit Union – The Works Fixed (Principal and Interest) 2 Years
Horizon Bank – Fixed Rate Home Loan 5 Years (LVR < 70%)
BCU Bank – Fixed Home Loan (Principal and Interest) 3 Years
Greater Bank – Great Rate Fixed Investment Loan (New Customers) (Principal and Interest) 3 Years
Up – Up Home Fixed 4 Years (Principal & Interest) (LVR ≤ 90)
Auswide Bank – Freedom Package Home Loan Plus Fixed 1 Year (Principal and Interest) (LVR 70%-80%)
Qudos Bank – Fixed Rate Investment Loan (Principal and Interest) 3 Years (LVR < 80%)
Should I fix my home loan in 2023?
Trying to decide whether you should fix your home loan can be stressful, and ultimately, there is no right or wrong answer.
The decision as to whether to fix your home loan ultimately comes down to your personal and financial circumstances, and your feelings about market conditions.
While many borrowers fixed their home loans during the pandemic, with mortgage rates falling below 2%, the average mortgage rate in Australia in June 2023 is 5.94%. In this time borrowers would have insulated themselves from any rate rises.
However locking in now could mean you’re stuck with a high home loan interest rate for years to come - economists expect interest rates to begin declining sometime in 2024.
If you’re a first home buyer, a fixed-rate loan may be a suitable choice as it can be easier to budget and stay on top of repayments.
However, it you’re looking for flexibility (e.g. offset account, redraw facility) a variable-mortgage may be your go-to.
Only you can decide whether to fix, or not fix your home loan. But to give you a helping hand, here’s a list of pros and cons that may guide you in the right direction.
Pros of locking in an interest rate
- Budget is a priority - A fixed rate might be suitable if you want to be able to budget years into the future accurately, knowing your home loan repayments will be the same every month.
- You're predicting an interest hike - You might also look for a fixed-rate if you have been keeping an eye on the RBA and other market factors and think interest rates are likely to increase further during your loan period. Be aware that the lender has likely factored this in, too.
- Financial certainty - In a rising rate environment, the amount of interest you will pay on your mortgage will not change for a stipulated period. In other words, you’ll be unaffected.
Cons of locking in an interest rate
- Potential to miss out on rate cuts - If interest rates fall after you lock in your home loan rate, you may miss out on lower mortgage repayments.
- Lack of features - Fixed-rate home loans typically do not offer features such as an offset account, redraw facilities, and the ability to make extra repayments without penalty.
- Break costs - If you want to refinance and ‘break’ your fixed-rate, you will typically be charged a fee for ending the term early. The amount could add up to thousands of dollars and is usually based off of how much time is left on your fixed-term and the balance of the home loan.
- A bet with the bank - At the end of the day, locking in a fixed rate is somewhat of a bet you make with your lender that you think interest rates will rise further. However, the bank likely forecasts similar and has priced the fixed-rate home loan accordingly - likely more expensive than a variable rate. Do you know more than a bank and its team of economists?
When a fixed-rate may not be a good idea
- Interest rates are falling
- Interest rates are increasing but have likely reached their peak
- You plan to refinance your home loan during the fixed-rate period; you will likely incur break/exit fees
- You plan to renovate or build a new home by using the equity in your property
- You plan to sell your property in the near future
- You would like to access additional features, usually available with a variable home loan e.g. extra repayments, offset accounts.
- You let life admin fall by the wayside: When you roll off a fixed rate, you’ll likely be placed on a much less competitive variable rate, and if you don’t take action, you could be left paying hundreds or thousands more on the mortgage.
What happens when a fixed home loan term ends?
All good things must come to an end.
When the time comes for your fixed-rate to expire, there are generally a number of options open to you - these are known as the three R’s:
If you have enough equity in your property, you may be able to refinance your home loan - with a new or existing lender - once your fixed-term ends.
If you’re happy with your current lender, make a pricing request to make sure you’re on a competitive interest rate (typically the ones they reserve for new customers). If they’re not coming to the table, you may need to consider switching to a new lender. Some lenders are eager to secure the business of refinancers, and are willing to not only offer discounted interest rates, but other features and benefits such as cashback offers.
Consider whether you’re after a variable-rate home loan, or maybe even a split loan (more on this below).
Depending on the lender, you may be able to re-fix your home loan again. For example, if your three-year fixed period ends, you can re-fix for another three years. But keep in mind this likely won’t be at the same interest rate you had previously - it’ll likely be higher. So take the time to find out if this option is a financially smart decision.
If you’re after additional home loan features or are looking to sell/renovate your property, re-fixing may not be the right choice.
At the end of your fixed term, your home loan will typically revert to your lender’s standard variable rate.
While this may seem like the easiest and most convenient option, it does come with a downside.
The standard variable rate tends to be much higher (could be more than 1% higher) than other deals on the market, as lenders will often reserve their more competitive rates for new customers.
Alternatives to fixed-rate home loans
1. A variable rate home loan
Variable rate loans carry an interest rate that fluctuates in line with internal and external factors e.g. the RBA cash rate.
They tend to offer extra features and much more flexible repayment options than fixed rates. For example, if you have a variable rate mortgage and the interest rate goes down, you could continue to make the same monthly repayments, and thus reduce your loan term and the total amount of interest you will pay over time.
If you like the sound of the flexibility a variable rate offers and want to roll the dice, you can compare a range of some of the most competitive selection of variable rate home loans with Infochoice.
See Also: Redraw vs Offset Home Loans Explained
2. A split home loan
A split home loan allows borrowers to split their mortgage into two separate loans - one portion is charged interest at a fixed rate while the other portion is charged at a variable rate. The size of each portion is up to you e.g. 60/40 or 50/50.
Check out InfoChoice’s Split Home Loan Calculator to experiment with different split loan scenarios.
3. A capped-rate home loan
A capped-rate home loan is a mortgage that allows borrowers to retain their variable rate with the guarantee that it will not rise above a set interest rate for a particular period of time.
For example, John has a capped-rate home loan. The cap rate is 6.25% p.a. and the capped period is three years.
John’s interest rate cannot go above 6.25% p.a. during the first three years of the loan, even if the RBA lifts the cash rate - he is essentially protected.
At the time of writing, Northern Inland Credit Union is the only bank offering a capped-rate home loan in the Australian market.
4. Rate lock
If rates are rising sharply and you haven’t yet settled on a home loan, many lenders offer what’s called a rate lock. You can lock the rate in at the time of application usually for up to three months.
Rate locking comes with a fee, usually 0.10% to 0.15% of the home loan value. on a $600,000 home loan this could equate to $600-$900. Other banks might charge a flat fee - anywhere from $500 to $1,000.
This won’t provide interest rate certainty during your home loan, but it will insulate you from any rate rises when going from application to settlement on the home loan.