When applying for a home loan, understanding the different home loan options available is crucial to making the right choice for your financial situation. Fixed rate home loans offer specific features that appeal to borrowers seeking certainty and predictability in their repayments. This guide explores the key characteristics of fixed interest rate home loan products to help you determine if this option aligns with your home ownership goals.
What is a Fixed Rate Home Loan?
A fixed rate home loan locks in your interest rate for a predetermined period, typically ranging from one to five years. During this time, your home loan interest rate remains constant regardless of market fluctuations. This contrasts with a variable rate home loan, where your interest rate can rise or fall based on market conditions and lender decisions.
For borrowers seeking financial stability and predictable budgeting, fixed interest rate home loans provide peace of mind knowing exactly what their repayments will be throughout the fixed period.
Key Features of Fixed Rate Home Loans
Rate Certainty and Protection
The primary feature of a fixed interest rate home loan is the guaranteed interest rate for the fixed term. This protection shields you from potential interest rate increases that could significantly impact your monthly budget. When calculating home loan repayments during the application process, you'll know precisely what you'll pay each month, making it easier to plan your finances and achieve home ownership goals.
Fixed Term Options
Most lenders across Australia offer various fixed term options, commonly including:
- 1-year fixed periods
- 2-year fixed periods
- 3-year fixed periods
- 4-year fixed periods
- 5-year fixed periods
The term you choose depends on your financial circumstances, market outlook, and how long you want rate certainty. Some lenders may offer longer fixed periods, though these are less common.
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Split Loan Arrangements
Many borrowers don't realise they can combine fixed and variable portions within their home loan package. A split loan allows you to fix a portion of your loan amount while keeping the remainder on a variable interest rate. This hybrid approach provides some rate certainty while maintaining the flexibility and features typically associated with variable home loan rates.
For example, you might fix 60% of your loan to protect against rate increases whilst keeping 40% variable to take advantage of potential rate decreases and access features like an offset account.
Understanding Fixed Rate Limitations
Reduced Flexibility
Whilst fixed rate home loan products offer stability, they typically come with certain restrictions that borrowers should understand before committing:
Limited Additional Repayments: Most fixed interest rate home loans cap the amount of extra repayments you can make annually, often between $10,000 and $30,000. Exceeding this limit usually triggers break costs or fees that can be substantial.
Break Costs: If you exit your fixed rate loan early - whether through refinancing, selling your property, or paying off the loan - you may face significant break costs. These fees compensate the lender for the interest they would have earned had you maintained the fixed rate for the full term.
Offset Account Restrictions: Fixed rate home loans rarely offer a linked offset account or mortgage offset facility. This means you can't reduce the interest charged on your loan by parking savings in an offset account, a feature commonly available with variable rate products.
Redraw Facility Limitations
When you make additional repayments within the allowed limits, accessing these funds through a redraw facility may be more restricted compared to variable rate loans. Some fixed rate products charge fees for redraw requests or limit how frequently you can access these funds.
Comparing Fixed and Variable Home Loan Options
When conducting a home loan rates comparison, consider these factors:
Fixed Rate Benefits:
- Predictable repayments support budgeting
- Protection from interest rate increases
- Potentially lower rates when you lock in during favourable market conditions
- Financial stability during the fixed period
Variable Rate Benefits:
- Ability to make unlimited additional repayments to build equity faster
- Access to offset account features
- Potential to benefit from interest rate decreases
- Generally more flexible for changing circumstances
- No break costs for early exit
Fixed Rates and Different Loan Purposes
Fixed interest rate home loans are available for various purposes:
Owner Occupied Home Loan: Fixed rates for your primary residence typically offer lower interest rates compared to investment properties.
Investment Properties: Investment loans with fixed rates help property investors forecast their returns more accurately, though rates are generally higher than owner occupied home loan products.
First Home Buyers: For those securing their first home loan, fixed rates can provide the certainty needed when adjusting to mortgage repayments for the first time.
Interest Only versus Principal and Interest
Fixed rate home loans are available in both repayment structures:
Principal and Interest: Your repayments cover both the loan amount and interest charges, allowing you to build equity in your property progressively. This approach helps improve borrowing capacity for future lending as you reduce your debt.
Interest Only: You only pay the interest charges during the interest only period, keeping repayments lower but not reducing your loan balance. This option is more common with investment properties for tax purposes but is also available for owner occupiers, though with stricter lending criteria.
Factors Affecting Fixed Home Loan Rates
Several elements influence the current home loan rates you'll be offered:
- Loan to Value Ratio (LVR): Borrowers with larger deposits (lower LVR) typically access lower rates
- Loan amount: Some lenders offer rate discounts for larger borrowing amounts
- Loan purpose: Owner occupied loans generally have lower rates than investment loans
- Fixed term length: Shorter fixed periods may have different rates compared to longer terms
- Lender pricing: Different banks and lenders across Australia have varying pricing strategies
Lenders Mortgage Insurance and Fixed Rates
If your deposit is less than 20% of the property value, you'll need to pay Lenders Mortgage Insurance (LMI) regardless of whether you choose fixed or variable rates. This insurance protects the lender if you default on your loan. The LMI premium is calculated based on your LVR and loan amount, and this cost is the same whether you fix your rate or not.
Portable Loan Features
Some lenders offer a portable loan feature with their fixed rate home loan products. This allows you to transfer your existing fixed rate to a new property if you move during the fixed period, potentially avoiding break costs. However, this feature isn't universally available and may come with conditions, so it's worth investigating if you anticipate relocating.
Making Your Decision
Choosing between fixed, variable, or split rate home loan options depends on your individual circumstances:
- Your tolerance for repayment fluctuations
- Whether you plan to make substantial additional repayments
- Your need for offset account functionality
- How long you intend to hold the property
- Current interest rate environment and forecasts
- Your overall financial goals and secure future planning
To access home loan options from banks and lenders across Australia and compare rates effectively, working with an experienced mortgage broker can provide valuable insights tailored to your situation.
At Empire Road Investments, our team specialises in helping Australian borrowers understand their home loan choices and find suitable home loan packages for their needs. Whether you're looking to invest in property, achieve home ownership, or need lower repayments, we can assist with your home loan application and home loan pre-approval.
Call one of our team or book an appointment at a time that works for you to discuss your fixed rate home loan options.