Thinking of breaking a fixed-rate contract? Here's what you should know
Switching from a fixed-rate home loan may not be as easy as some borrowers think.
12 Jan, 2022
|Advertised rate||Comparison rate*||Monthly repayment||Rate Type||Offset||Redraw||Ongoing Fee||Upfront Fees||LVR||Lump Sum Repayment||Additional Repayments||Pre-approval|
Complete Fixed Home Loan (Principal and Interest) 1 Year (LVR < 80%)
Advantage Package Fixed Rate Home Loan (Principal and Interest) 1 Year (LVR 60%-80%)
Premium Package Home Loan Fixed 3 Years
Fixed Rate Home Loan (Principal and Interest) 2 Years (LVR 80%-95%)
Fixed Rate OO P&I - 1 Year
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of January 17, 2022.
A fixed rate home loan is a home loan where the interest rate is fixed (meaning it doesn’t change) for the duration of the term specified. This is usually between one and five years, but it can depend on the lender.
There are a few advantages and disadvantages of fixing your home loan interest rate. A fixed home loan can offer more stability than a variable home loan because your repayments won’t change during the fixed loan period. So if your monthly mortgage repayments are $2,500 they will stay exactly the same throughout the duration of the fixed period, making it easier to budget accordingly for other things. This is why fixed home loans are so popular among first home buyers and investors.
Fixing your mortgage interest rate also means you’ll be protected from any rate hikes during the fixed rate period. However, if variable rates drop during the fixed period, you could end up with a higher rate and be paying more than the average punter. This is why fixing your interest rate can be a bit of a gamble.
However, fixed rate home loans can be less flexible than variable home loans which generally have more home loan features like an offset account or redraw facility . You also can’t refinance your fixed home loan during the fixed period without incurring significant break costs for ending the fixed period early.
Fixed rate home loans generally have fewer features than variable rate home loans. However, some fixed home loans do come with features like offset accounts , redraw facilities, or the ability to make extra repayments.
However, it’s worth noting fixed home loans that offer these kinds of features are relatively rare and some lenders reserve these features for their variable loans only. If having a home loan packed with features is something that’s really important to you, a fixed home loan may not be suitable for you.
Fixed rate home loans can be preferable for those who want stability and are risk averse. Investors and first home buyers generally favour fixed home loans because they want repayment certainty in the first two to three years of owning their home.
However, fixed home loans can ironically be risky because choosing when to fix your rate can be a bit of a gamble. If interest rates are low, locking in that low rate could protect you from future rate hikes. But if interest rates fall even further, you’ve essentially locked in your repayments at a higher rate and will miss out on potentially lower repayments.
Before signing away on the dotted line, it’s important to do your research and make sure you compare all your options by considering the following:
The headline interest rate isn’t the only rate to take into consideration when comparing home loans. The comparison rate is just as important because it’s essentially the ‘true cost’ of the loan which includes upfront and ongoing costs based on a $150,000 loan term over 25 years.
It’s also important to take the revert rate into account when comparing fixed home loans. The revert rate is the interest rate the loan reverts to once the fixed term period is over. Don’t make the mistake of assuming the lender will automatically switch your loan over to their lowest standard variable rate. it’s more likely that your interest rate will revert back to the lender’s standard variable rate, which can be a lot higher than its lowest variable rates.
Another important thing to consider when comparing fixed home loans is what ongoing and upfront fees there are, including costly break fees.
If features like a redraw facility or offset account are important to you, a fixed home loan may not be the best option as these features are somewhat of a rarity among fixed loans.
Fixed home loans generally have fixed periods of between one and five years, though some lenders offer longer fixed term periods. Generally speaking, shorter fixed periods have more competitive rates than longer fixed periods. How long you want to lock in your rate for may also depend on your short-term property goals.
If you want to pour as much money as you can into your home loan right off the bat through extra repayments, a fixed home loan may not be the best option for you as they generally don’t allow extra repayments.
If you’re planning on moving within the next few years or just don’t know what your short-term future holds, locking yourself into a fixed home loan may not be the best idea as break costs can be very expensive.
If you can’t decide between a fixed home loan or a variable one, why not have both? A split home loan means that a portion of your loan is fixed and the other portion is variable.
This isn’t always a 50:50 split - it can be a 70% fixed and 30% variable split - or whatever is agreed upon by you and the lender. For example, if you took out a $600,000 loan, an 80:20 split loan would mean $400,000 would have a variable interest rate while the remaining $200,000 would have a fixed rate.
Splitting your home loan like this means you are essentially hedging your bets by taking advantage of both types of interest rates. If interest rates are falling, having more of your loan as variable means you get to reap the rewards of falling rates. On the other hand, fixing more of your loan could benefit you in a rising interest rate environment.
If you want to end your fixed loan contract early because you want to switch loans or lenders, you will have to pay a break cost which can be expensive.
If you pay off a fixed home loan before the end of the fixed term, you will have to pay a costly break or discharge fee which can amount to thousands. If you want the ability to pay off your loan early, a fixed rate home loan may not be suitable for you.
Some fixed home loans may allow you to make extra repayments, but these extra repayments are usually up to a limit set by the lender. If you then make additional repayments over this amount, the lender may charge you a penalty fee.
Historically, fixed rates have been higher than variable rates but this hasn’t been the case recently with interest rates falling to historic lows. Generally, if fixed rates are lower than variable rates it’s a pretty good sign the lender expects rates to remain low for some time.
Most fixed home loans have fixed periods of between one and five years, but some lenders may offer fixed periods of up to 10 years.
The short answer to this is that it ultimately depends on your circumstances. If you need repayment certainty for the first few years of owning your home, a fixed loan is certainly worth considering.
However, if having features like a redraw facility, offset account or the ability to make extra repayments is really important to you, a fixed home loan may not be the best option. Similarly, if you’re planning on moving within the short-term or just aren’t sure what the immediate future holds, a fixed rate mortgage may not be suitable.
Before locking in a fixed rate, consider whether interest rates are likely to rise or fall in the near future.