Fixed rate home loans

How Fixed Rate Home Loans Work

A fixed rate home loan locks in your interest rate for a predetermined period, typically between one and five years. During this time, your repayments remain exactly the same regardless of what happens to interest rates in the broader economy. If the Reserve Bank of Australia raises rates three times during your fixed period, your repayments do not change. This certainty is the primary advantage of fixing your rate.

How lenders set a fixed rate

When you apply for a fixed rate loan, the rate you are offered reflects the lender's view of where interest rates are heading, the cost of funding a fixed-term facility, and competitive market positioning. Fixed rates are not simply a snapshot of today's variable rate, they are forward-looking and incorporate expectations about future rate movements. This is why fixed rates can sometimes be higher than variable rates (when rate cuts are expected) or lower (when rate rises are anticipated).

What happens at the end of the term

At the end of your fixed term, the loan reverts to the lender's standard variable rate. This revert rate is almost always higher than competitive market rates, which is why it is essential to take action before your fixed period expires: refix with your current lender, switch to a variable rate, or refinance to a new lender entirely. The fixed rate ending guide covers the timeline.

When Fixing Your Rate Makes Sense

Fixed rate loans are particularly suited to certain borrower profiles and financial situations. Understanding when fixing delivers genuine value helps you make a confident decision.

Budget certainty is paramount

If your household budget has limited room for increases in loan repayments, fixing your rate eliminates the risk of rate-driven payment increases. This is especially relevant for single-income households, first home buyers stretching to enter the market, and families with significant fixed expenses like childcare or school fees.

You believe rates will rise

If economic indicators suggest interest rates are likely to increase during the next 2-3 years, locking in today's rate protects you from those increases. However, remember that fixed rates already incorporate market expectations about future rate movements, so the "protection" is only valuable if rates rise more than the market has already priced in.

You do not need maximum flexibility

Fixed rate loans come with restrictions on extra repayments, and they do not offer offset accounts (with rare exceptions). If you have a stable financial situation and are comfortable making consistent repayments without needing to make large lump-sum payments, these restrictions may not affect you.

Understanding Break Costs

Break costs are the most important consideration for anyone taking out a fixed rate loan. They apply when you repay, refinance, or significantly alter your loan during the fixed term, including selling the property. Break costs are not arbitrary penalties; they represent the economic cost to the lender of unwinding a fixed-rate funding arrangement early.

How the break cost is worked out

The calculation is based on the difference between your fixed rate and the current wholesale swap rate for the remaining fixed term, multiplied by your loan balance and remaining term. When wholesale rates have fallen since you fixed, break costs can be very substantial. For example, if you fixed at 6.00% for 3 years and wholesale rates have dropped by 1.50% after one year, break costs on a $500,000 loan could exceed $15,000 for the remaining two years.

Conversely, if wholesale rates have risen since you fixed, break costs may be zero or close to zero. In some cases, a lender may even owe you a benefit, though this is typically not credited.

The key takeaway is to only fix your rate if you are confident in your ability to remain in the loan for the full fixed term. If there is any chance you might sell, refinance, or significantly change your circumstances during the fixed period, consider a shorter fixed term or a split loan structure. The fixed rate break costs guide works an example through.

Comparing Fixed Rate Offers Across Lenders

Fixed rate offers vary significantly between lenders, and the differences go beyond just the headline rate. When comparing fixed rate loans, consider the fixed rate itself and the comparison rate, the extra repayment allowance (ranging from $10,000 to $30,000 per year), the revert rate at the end of the fixed term, ongoing fees and annual charges, and whether a redraw facility is available during the fixed period.

Why the comparison rate matters more when you fix

The comparison rate is particularly important for fixed rate loans because it includes the revert rate in its calculation, giving you a more realistic picture of the loan's total cost. A lender with a very low fixed rate but a very high revert rate may have a higher comparison rate than a competitor with a slightly higher fixed rate but a more competitive revert rate. CommBank's packaged two-year fix in the table above, for example, shows a comparison rate well above its headline rate.

A broker compares fixed rate offers across the lenders on their panel, looking at the total package of features, fees and flexibility, not just the lowest number on paper.