Fixed-rate loan news - December 2024
Peter Drennan, Money's Research & Data Expert
"Fixed rates are fluctuating significantly as banks anticipate the RBA will begin cutting the cash rate in the first half of 2025. Fixed rates for owner-occupied loans under three years have decreased by 0.17% and by 0.19% for investors. The largest change, however, was a 0.26% drop in fixed rates for investor loans over three years."
Peter Drennan, Money's Research & Data Expert
What is a fixed rate home loan?
A fixed home loan has an interest rate that is fixed for a period — typically between one and five years. This means your repayments won’t change during the fixed rate period, protecting you from rate rises. On the other hand, it means you won’t benefit from lower repayments when rates drop during the fixed period.
While a fixed rate home loan may make budgeting easier by providing repayment certainty, you may not be able to make extra repayments, or there may be caps on additional repayments per year (e.g. maximum of $20,000 annually). You may also not have access to features like an offset account or redraw facility. Fixed rates are available on owner-occupier and investment home loans.
According to the Reserve Bank of Australia (RBA), only 1.9% of owner-occupier loans in Australia are fixed. Although, fixed lending has been higher in the past, especially when interest rates were recently at record lows.
What happens at the end of your fixed home loan term?
When your fixed rate term ends, you’ll generally have three options:
1
You’ll automatically roll onto a variable rate with your current lender and your repayments will change
2
You can refinance your home loan either to fix your rate again for another period with your existing lender or another lender
3
You could choose a different variable loan or split loan, either with your current lender or with another
What are the current fixed mortgage rates?
- The lowest fixed home loan rate on Money’s database is: 4.99% p.a. (comparison rate 6.15%. That’s for a three-year term from SWS Bank for owner-occupiers making principal and interest repayments (maximum loan-to-value ratio (LVR) applies).
- Based on the RBA’s Housing Lending Rates, the average 1-3-year fixed home loan rate is: 5.90% p.a. The average 4-5-year fixed home loan rate is: 6.41% p.a.
The best fixed home loan rates will vary depending on the type of home loan you need (e.g. owner-occupier home loans tend to have lower rates than investor home loans) and your LVR. Lenders consider LVRs below 80% less risky because you’re borrowing a smaller amount relative to the property's value. Lower LVRs usually come with lower interest rates, while higher LVRs typically result in higher rates.
How long should you fix your home loan rate for?
According to the RBA, most borrowers in Australia who fix their mortgage interest rate do it for three years or less. However, how long you should fix your rate will depend on your financial circumstances. If you’re unsure about your options, it’s best to speak to a mortgage broker before locking yourself into a fixed rate.
Mansour Soltani , Money's home loan expert
“Generally, you’ll get a lower interest rate if you fix your loan for two or three years compared to five years. That’s because lenders charge a premium for the certainty provided by longer fixed terms. Fixing your loan for a longer duration exposes the lender to more uncertainty regarding future interest rate movements. On the other hand, some lenders may charge lower interest rates on longer fixed term home loans because they’ll make their money in break fees if you refinance during the fixed term.”
Mansour Soltani , Money's home loan expert
Are fixed rates cheaper than variable rates?
Based on Money’s analysis of various lenders (including Australia’s big four banks), home loans with fixed rates are currently marginally more competitive than most home loans with a variable rate.
According to Mansour, this may signal lenders expect the cash rate to fall in the next few years.
“Lenders update their fixed rates regularly based on economists' predictions around cash rate changes. They need to ensure their fixed rates are indicative of the current interest rate environment. If the cash rate was expected to go up, lenders may charge borrowers a higher rate for fixing their loan to compensate for potential losses in the future.”
Fixed rate home loan pros & cons
Pros
- Your repayments remain the same — you’re protected if there are sudden rate hikes during the fixed period
- A fixed interest rate makes it easier to calculate your borrowing costs (during the fixed period)
- You can choose short or long-term fixed terms to suit your financial situation or goals
Cons
- You won’t benefit from lower repayments if there are rate cuts during the fixed period
- Fixed rate home loans have fewer features available (e.g. you may not be able to make extra repayments or redraw)
- You may pay hefty break costs if you refinance or pay off your fixed rate loan early
Fixed rate home loan features explained
Rate lock
Some lenders offer a rate lock option which allows you to ‘lock’ your fixed rate while your home loan application is being processed and the purchase of your home settles. This feature generally comes with a fee typically calculated as a percentage of your loan amount (ranging from 0.15% to 0.20%). Based on Money.com.au’s analysis, most lenders will allow you to lock your rate for up to 90 days.
Offset
An offset account is a transaction account linked to your home loan that offsets your loan balance so you pay less interest. Partial offset accounts (where only a percentage of your loan balance and interest is offset) are more common with fixed rate home loans than full offset accounts where every dollar goes towards offsetting your interest.
Additional repayments
Some fixed rate home loans allow additional repayments up to a specified limit. According to Money's analysis of various fixed rate loan products, some lenders may permit extra repayments of up to $10,000 or $20,000 annually.
Redraw facility
Some fixed loans come with a redraw facility. This feature allows you to withdraw additional repayments you've made on your mortgage. However, in most cases, redraw is only available at the end of the fixed rate period (i.e. when you roll onto a variable rate).
Flexible repayments
Some fixed rate home loans allow you to choose your repayment frequency (e.g. weekly, fortnightly, or monthly). Additionally, you could opt for a fixed rate home loan with an interest-only repayment option for a period of time. This is a common option among property investors.
Split loan
You can split your home loan into fixed and variable portions. This can help you ‘hedge your bets’ and benefit from the certainty of fixed repayments for a portion of your loan and get the flexibility and features of a variable rate loan for the other portion. You can choose the proportions of your split, whether it's 50/50, 60/40, or 70/30.
When should you choose a fixed interest rate?
Here are three scenarios where choosing a fixed rate home loan could be suitable.
1. Rates are historically low or increasingly volatile, and you want to lock in your current rate
According to Mansour, borrowers tend to fix their home loans when interest rates are low because there's no guarantee that rates will remain at these levels in the future. By locking in a fixed rate, borrowers can secure favourable terms and protect themselves from potential rate increases in the future (at least during the fixed period).
2. You value the certainty of a fixed repayment amount more than getting the absolute lowest rate
Fixed rate home loans offer stability and predictability in your repayments over the fixed term. If you prefer to know your exact repayment amount each month and avoid fluctuations in your budget, a fixed rate loan can be an attractive option. For example, some borrowers with tight financial constraints (e.g. retirees, first-home buyers) may prefer the certainty of a fixed rate over the lowest available variable rate. In some cases, the fixed rate could also be the lowest rate.
3. You’re an investor looking to manage cash flow
Fixed rate mortgages offer predictability in monthly repayments, making it easier for investors to forecast cash flow and plan their finances, particularly if they have investment properties generating rental income. Investors with multiple rental properties may choose fixed rates to mitigate interest rate fluctuations impacting their portfolio.
How to compare fixed home loans
1
Focus on the interest rate (the comparison rate could be a red herring)
The comparison rate is designed to reflect the total annual cost of a mortgage — including interest and fees. But this calculation is based on a 25-year loan term, which will be long after your fixed rate term expires. The comparison rate will therefore be based partly on the fixed rate and the variable rate your loan would roll onto by default at the end of the fixed term. That rollover rate is generally not the most competitive variable rate available. So, in the case of fixed rate home loans, the advertised interest rate may be more practical for comparing your options.
2
Consider which fixed loan term is appropriate for you
Compare different loan terms offered by lenders and consider whether you prefer a shorter-term fixed rate or the certainty of locking in your rate for a longer period. For example, borrowers who plan to sell their property or refinance within a few years may opt for a shorter fixed rate, while borrowers who can find a competitive rate on a longer fixed term may be happy to ‘set and forget’ for 4-5 years.
3
Check out the home loan fees
Over time, home loan fees can add up to around 1% of your initial loan amount, sometimes more. In addition to standard fees like application fees, monthly fees and annual package fees, some lenders may also charge a ‘rate lock’ fee. This fee applies if you want to lock in your fixed rate before your loan application is approved to avoid a rate hike. You’ll also pay break fees if you repay your fixed rate loan early or refinance.
4
Shop around for home loan features
Fixed rate home loans generally have fewer features than variable loans, but you may be able to find lenders that allow you to make extra repayments up to a limit. Some fixed rate home loans also come with a redraw facility or offset account.
