Is a fixed interest rate home loan best for you? What you need to know

Fixing your home loan rate - what you need to know

When you’re applying for a home loan an important decision to make is what type of repayment you want to make and there are a few different options for you to choose from.  Choosing the type of rate is an important aspect of finding the right home loan for you and one that doesn’t come easy. When choosing your home loan rate, you can choose between fixed or variable interest rates. In this blog, we dive into everything you need to know about fixed loans and whether they are right for you.

What is a fixed interest rate?

A fixed rate home loan means that the interest rate stays the same for a set period of time regardless of changes to the RBA official cash rate. This means that your repayments will remain constant during the fixed period, which can make budgeting a little easier.. It’s important to remember though, that once you’ve locked in a rate you can’t change it easily for the specified term - 1 to 5 years. (This is different to a variable rate that can change right from the start of your home loan.)

Can fixed interest rates change?

Fixed interest rates are generally set for a specific period, commonly ranging from one to five years. During this fixed-rate period, the interest rate remains constant, and borrowers are protected from fluctuations in the market interest rates. However, once the fixed-rate period ends, the interest rate on the loan will typically revert to a variable interest rate.

How long can you fix your home loan for?

Homebuyers can typically fix their home loans for periods of up to five years. However, it’s essential to keep in mind that lending practices and regulations are subject to change, and different lenders may offer varying terms and options. 

Who are fixed rate interest-only home loans for?

Fixed-rate interest-only home loans are designed for borrowers who want to make lower repayments during the initial period of their loan. These loans are particularly suitable for borrowers who are looking for short-term financial flexibility or those who expect their income to increase in the future.

How are interest rates calculated?

There are a number of different factors that can cause interest rates to rise or fall. Every month (except January) the Reserve Bank of Australia (RBA) meets to decide whether they will shift the cash rate. Usually home loan variable rates follow the lead of the cash rate and will move the same way it does.

If the RBA wants to encourage Australians to spend more, they’ll lower the cash rate (so interest rates drop), and if they want to slow spending down to encourage saving, they’ll raise it (so interest rates rise). Lenders can also choose to raise or lower their rates independent of cash rate changes.  

Because fixed rates stay the same throughout their fixed period, they do take into account predicted rises or falls in the market and are usually priced accordingly. So, if lenders expect there to be a future rise in the cash rate, their fixed rates will likely be higher than their variable rates, and vice versa if they are expecting a drop.

Should I consider fixing my home loan rate?

Before deciding whether or not to fix your rate, it’s important to first understand the pros and cons of fixing so you can decide whether it’s the right move for you.

Pros

Fixing your home loan rate means that you’re securing that interest rate for a fixed amount of time. When interest rates are low, fixing your home loan rate ensures your rate stays that low for your fixed period. This means not only will you be able to budget more effectively because you know exactly what your repayments will be; but also if you secure a low fixed rate before a rate rise, you’ll save money on your repayments.

Cons

Fixed loans have less flexibility, and include large break costs if you break your contract before the fixed period ends. So, if you’re planning to move house soon, or not sure what the short-term future holds, it may be best to stay with a variable rate. 

Fixing your home loan also means you need to check the roll-to rate to further understand what the interest rate for the loan might be at the end of the fixed period.

Likewise, if paying your home loan off quickly is a priority to you, switching to a fixed loan may not be right for you either. Because with a fixed rate loan, you are typically capped on the amount of additional repayments you can make to reduce your loan balance, and can be charged fees if you do.  

Having said that, one thing a Qantas Money fixed rate home loan offers that many other fixed rate loans don’t is an option to have an offset account attached to your home loan for $10/month. This means you can have the security of the fixed loan, as well as the flexibility of being able to reduce your interest payments and access your savings at any time via an offset account.

Learn more about pairing a fixed rate home loan with an offset account here.

To fix or not to fix?

Whether or not you decide to fix your rate, when interest rates are low you should still consider refinancing to make sure you have a good deal on your existing home loan rate. If you’re on a lower variable rate, if rates do go up, at least they’ll go up from a lower base.

How do I fix my home loan rate?

If you’re looking to buy your first home, all you need to do is find a fixed home loan that you like and apply (see Qantas Money Home Loan’s fixed rates here). If you’ve already got a home loan, it’s much the same, except once you’ve found a fixed home loan you like, you’ll need to refinance your current home loan.

How Qantas Money Home Loans can help?

Once you've found the fixed rate you're after and the house if you're buying, then start your application or talk to one of our experts. At Qantas Money Home Loans, we understand that your home loan has to work in line with your financial situation and goals. That’s why our home loan experts are available to help you review your current situation and answer any questions you may have to see if fixing your rate is right for you. 

^* You have to be a Qantas Frequent Flyer member to apply for the Qantas Home Loan. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.