What is a fixed rate home loan?

How does it differ to a normal variable home loan?

When is a good time to fix my home loan?

What are the benefits of fixing?

These are all relevant questions and ones you should know the answers to.

A fixed rate home loan is usually for a set period – often 1, 2, 3, 4 or 5 years.  You can go up to 10 or even 15 years but you will find these rates are significantly higher.

VariableFixed
GeneralInterest rate moves in line with the bank’s standard variable rate, which generally mirrors the RBA’s cash rate movements.The interest rate is fixed for a period of time.  So, you know exactly what you’re repaying.
Redraw AllowedYou can withdraw your extra repayments.Not allowed in the fixed period.
Extra RepaymentsUnlimited extra repayments to pay the loan off faster with no extra costsMore restrictive.  Usually limited to a fixed amount (eg. $5k or $10k per year) or a percentage of the debt.  Any more than this has a fee attached.
OffsetGenerally, 100% offset against variable debt.  Some of the more basic loans don’t offer this.Generally none, with the exception of a handful of loans
Exit CostNilThere may be break costs depending on interest rate movements since you fixed

Ideally, the best time to fix a rate is when variable rates don’t look like they will fall any further in the short to medium term.  It is easy to see why – you only achieve an interest rate saving with a fixed loan if variable interest rates rise during the term of the fixed loan.

Forecasting interest rates is nearly impossible, so it is always a bit of a gamble.  One inherent risk is that if interest rates fall, you might miss out on a cut in official interest rates and you’re stuck with the rate you locked in at for the duration of your fixed loan.

So, all things considered, fixed loans are like a form of insurance that your interest payments won’t go up or down during the fixed term.  They are also an excellent budgeting tool, especially for first home buyers taking on their first ever large debt.

Another option is to make a bet both ways and only fix part of your home loan.

Some people fix 50% of their loan and keep 50% as variable to manage some of the risk of interest rate rises while still being able to make extra repayments.

Interest rates, both variable and fixed very significantly by lender.  Please contact us to find out whilst lender and loan product will best meet your needs.