Whether you’re a first home buyer or a seasoned property investor, choosing between a fixed or variable home loan is one of the most difficult decisions property owners face. There are advantages and disadvantages to both fixed and variable home loans, which need to be carefully considered before any final decisions are made.
While there’s no absolute answer to the question of which one is better, your short-term and long-term financial plans could provide you with greater insight into whether fixing interest rates on a home loan is right for you.
What is a fixed home loan?
A fixed home loan is a type of mortgage loan where the interest rate remains fixed for the length of the term agreed. This is different from variable interest rate home loans, which can change as a result of market conditions and the cash rate set by the Reserve Bank of Australia (RBA).
A fixed-term interest rate will usually revert to the standard variable rate once the fixed interest period expires.
What happens when you fix your home loan?
By fixing interest rates on a home loan, you’re ‘locking in’ your interest rate for a certain amount of time. This means that you can fix your home loan interest rate so that repayments will remain the same for the agreed-upon period, which typically ranges from one to five years.
Once your home loan is fixed, there are certain restrictions that may be placed on it. These will all be detailed in your home loan contract. Fixed loans generally only allow up to $10,000 of additional repayments per year (during the fixed period) and don’t provide an offset or redraw (during the fixed period).
Fixed interest rates could be a popular type of home loan for first homebuyers as they provide certainty regarding the costs of future repayments.
What are the benefits of fixed interest rates?
There is no absolute answer to whether it’s good to fix your home loan. Certain benefits may only be advantageous to specific borrowers so it’s recommended that you consider each of the advantages by whether they would impact you.
By taking out a fixed interest home loan, a borrower may be able to:
- Avoid rising interest rates
If interest rates rise, the rise won’t impact your fixed rate and the repayments during your fixed term. Depending on how much interest rates rise, this could potentially save you a significant amount of money.
- Enjoy greater financial security
Perhaps the main benefit of fixed interest rates is that they offer financial certainty. With a fixed rate home loan, you may be able to budget more accurately and make informed plans for the future.
The stability of paying a consistent interest rate for a set amount of time could also provide reassurance that you’ll be able to meet your repayments on time. For first-time home buyers, this certainty could be particularly helpful as you adjust to making recurrent repayments and build equity in your home.
What are the negatives?
There are also a number of drawbacks to taking out a fixed home loan that should be considered in light of your financial situation.
- Less flexibility
Fixed home loans generally do not offer the same flexible features that are often available for variable home loans. This includes the options to make extra repayments (over $10,000 per year), open an offset account or redraw funds. All of these features could help lower the amount of money that you spend on interest.
- Not impacted by rate cuts
Not being affected by rising interest rates also means not benefiting from rate cuts. Even if your lender lowers variable interest rates, a borrower on a fixed home loan must continue paying their locked interest rate until the end of the fixed loan term (unless they want to break costs, which can be significant).
- The fixed term will end
The fixed term of your interest rate will end, meaning it will not cover the length of your home loan. After the term ends, your interest rate will revert to the standard variable rate, which may have gone up since you signed up for the home loan. This may make future repayments difficult to meet. Alternatively, you could consider refinancing to a different loan or lender when reaching the end of the fixed term.
- Break costs
If you decide to refinance your fixed interest rate loan to take advantage of a drop in interest rates, you may be required to pay significant “break” fees to discharge the fixed interest loan.
What is a rate lock?
A rate lock for a fixed rate home loan enables fixed rate home loan applicants to hold the current fixed rate for their chosen term for a 90 day period starting from when the application is applied.
The fee associated with a rate lock is $649, and this fee must be paid up front. The rate will be locked in once the form is received and the fee is paid in full. If you are switching from another product to a fixed rate loan and require rate lock, the fee will be deducted from your nominated Qudos account or you can pay by credit/debit cards.
For new loans, If the loan is not funded prior to the rate lock expiry, the rate lock fee is still payable. If the fixed rate changes within the 90 day period, the rate lock will guarantee you the lower of the current rate or rate locked in at the time the rate lock application is applied. Please call us for more information or to apply for a rate lock please complete the rate lock form.
If you’d like advice that takes into account your personal financial situation, contact us today to speak with a member of our team who can provide you with more details on your options and help you make the right decision.
Need help deciding or to fix your rate? Get in contact today!
Normal lending criteria, terms and conditions and fees and charges apply. Mortgage insurance is required for home loans over 80% and is subject to approval.
Interest only subject to approval. During an interest only period, your interest only payments will not reduce your loan balance. This may mean you pay more interest over the life of the loan.
You should read and consider the relevant terms and conditions (available on request) and our Financial Services Guide before deciding whether to obtain any of our financial products or services.
Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305. The information in this article is of a general nature and has been prepared without considering your objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances.
Published January 2023