Compare fixed rate home loans
If you’ve been shopping for a home loan, you’ve probably noticed that currently, fixed rates are lower than variable. The RBA’s figures for November 2020, show that the average interest on a 3-year fixed-rate home loan is 2.2%, while the average variable rate is 4.52%. However fixed-rate loans generally have higher fees, fewer features, and more restrictions. In this article we answer some common questions to help you decide if a fixed-rate home loan is the right choice for you.
What’s a fixed-rate home loan?
Interest rates are constantly changing in line with market movements, making variable-rate home loan repayments hard to budget for.
A fixed-rate home loan, on the other hand, freezes the interest rate and sets out regular and consistent repayments for the first few years of the loan. Fixed-rate mortgages are useful for first home buyers, investors who want to make sure their interest costs don’t exceed their rental returns, and anyone who doesn’t like surprises.
How long can I have a fixed-rate home loan?
Most mortgage lenders in Australia will offer a fixed-rate term of 1-5 years. Some may offer up to 10 years. Generally speaking, longer fixed-rate terms are riskier for lenders, and they will likely charge higher interest rates for them.
What’s the revert rate, and how does it affect my fixed-rate home loan?
After the fixed-term is over, your loan automatically reverts to a variable loan. The interest rate you are charged is the ‘revert rate’, and it can be higher than the average variable rate that is available on the market at the time. If you’re being charged the revert rate, you may want to consider shopping around for better deals.
Can I refinance a fixed-rate home loan?
If you find a better deal elsewhere, you may want to swap lenders or products. This is known as refinancing.
Once the fixed-rate period on your home loan has expired, you can negotiate with your existing lender for another fixed rate or a better variable rate. Or you can choose another lender entirely.
It’s important to note that if you try to refinance before the fixed-rate period is complete, you could be liable for hefty breaking costs.
What are the breaking costs on a fixed-rate home loan?
People break fixed-rate home loan agreements for a variety of reasons. Here are just a few:
- To get a better interest rate through refinancing.
- To pay off the loan early and save interest costs.
- For personal reasons that require the sale of the house, such as a divorce or a move interstate.
In all these situations, you’re terminating your fixed-rate contract early, which can result in losses for the lender. Most fixed-rate home loan contracts specify that you need to cover these losses. Since the impact to the lender is dependent on the market rates at the time you opt out of your fixed-rate home loan, they are hard to predict and can end up costing you thousands.
On the other hand, if the market rates are higher than your fixed-rate, then the lender can just loan that money to someone else at the higher rate. They aren’t out-of-pocket as a result of you terminating the loan agreement early, and so you don’t have to pay any penalties.
What are the fees on a fixed-rate home loan?
Another important cost to consider when opting for a fixed-rate mortgage is the early repayment fee. Your lender may allow you to make some limited extra repayments without breaking the fixed-rate contract, but they can charge you a fee for doing so. You’ll need to weigh up the early repayment fee against the interest you save by making the repayment.
Other general fees that apply to most mortgages, including fixed-rate home loans, include the following:
- Application fees: $200-$700
- Ongoing administration costs: $0-$15
- Discharge fee: $300-$500 (This is different from the break fee. The discharge fee is the administrative cost of wrapping up your loan and transferring the deed of the property.)
- Fees for using extra features of the loan
Pros and cons of a fixed rate home loan
Protect yourself from interest rate increases
If you have a fixed-rate home loan and interest rates increase, then you will not be affected. This could potentially save you thousands in the long run.
Easy to budget for
Repayments amounts and frequency are set as part of the fixed-rate home loan contract and don’t change until the contract expires, making them easy to plan for.
Miss out on the benefits of interest rate decreases
If interest rates decrease, then you won’t be able to take advantage of the savings with a fixed-rate home loan.
Early repayment restrictions
Your lender may limit your ability to make extra repayments, or they may charge you a fee for doing so. This means that if you have a windfall, you may not be able to use it to pay your loan off early and save on interest costs.
Early termination costs
If you try to end your fixed-rate home loan contract early, you could be liable to pay thousands of dollars.
How to compare the best fixed-rate home loans
Our comparison tool shortlists the best fixed-rate home loans from a variety of lenders. Here are a few tips to help you decide which one is best for you:
At first glance, you may be tempted to choose the loan with the lowest interest rate. But loans with low rates often have high fees, and can sometimes end up costing you more. The comparison rate combines the interest and fees together and is a much better way to compare the costs of two different loans.
As we’ve already discussed, an offset account and early repayment and redraw options can save you thousands. But there are usually fees involved. Consider carefully if you have the cash flow to take advantage of these features and whether the savings outweigh the costs.
Our home loan calculator can help you figure out how much your repayments will be and how much interest you’ll need to pay. When budgeting for a fix-rate home loan, remember to leave yourself some wriggle room, in case unexpected expenses pop up.