Fixed interest rate home loans

Fixed home loan rates provide you with the assurance of a set home loan repayment amount for a pre-determined period of time.

A good mortgage adviser will help you determine what length the fixed term should be on your home loan, based on your financial situation and your personal preferences.

A fixed interest rate home loan is set by your lender; they borrow money from the wholesale money markets and then sell this on to you. The cost to the lender of borrowing this money is determined by what the money markets believe interest rates will do over a set term. Your lender will then add a margin to this. The final interest rate is then offered to you for the fixed term you’re applying for.

Pros of a fixed interest rate loan:
  • You will know how much your loan repayments will be for a fixed period, regardless of market interest rate changes
  • Protects you against interest rate rises
  • You can pick the time period to suit you; fixed terms are available from six months to 10 years
Cons of a fixed interest rate loan:
  • May be less flexible than a variable home loan rate, limiting additional repayment options and excluding the option to redraw
  • If your circumstances change and you want and/or need to exit the loan early, early exit fees will apply
  • Over the term of your loan you may end up paying more than if you had selected a variable home loan, even in a rising interest rate market

Fixed home loan rate specials
Normally at least one lender will have a special on fixed home loan rates at any given time, which may help you with your decision on whether or not to choose a fixed home loan. If you would like to know what fixed home loan rate specials are available to you, talk to your mortgage adviser.

What about flexibility and fixed home loan rates?
Traditionally, fixed home loan rates provide interest rate and repayment certainty but little flexibility. Although still not as flexible as a standard variable rate home loan, fixed home loan rate flexibility has improved over recent years.

For example, with many fixed home loan rates, you are now able to make additional repayments up to a set amount without being penalised. A home loan offset account may also be available. Some lenders will allow more flexibility, especially if they are promoting a fixed home loan rate special. Your Loan Market mortgage adviser will be able to confirm what features are available for the specific fixed home loan rate you are considering.

Be aware, with fixed home loan rates you are likely to be liable for hefty exit fees if you pay the loan out before the end of the fixed rate period.

Break costs on fixed home loan rates
When interest rates fall, you may look at your current fixed home loan rate and think you would be better off refinancing to a variable home loan rate to take advantage of interest rate cuts. However, you should be aware that there are break costs associated with exiting a fixed home loan rate early.

Break costs are made up of two components; a relatively small home loan exit fee, and another fee that covers the economic cost to your lender of no longer having your fixed rate home loan.

It is this second fee that can make exiting a fixed home loan rate an expensive exercise. Each lender has a different way of calculating break costs, but generally speaking, they will want to recover the cost of the interest and fees you would have paid to them had your fixed rate loan run its full term. The earlier in the loan term you exit a fixed rate, and the larger your loan, the higher your break costs will be.

You should also be aware that there are also likely to be some fees to set up your new variable rate home loan too, particularly if you are also changing lender. A list of likely fees and charges can be viewed under Home Loan Fees and Charges.

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