Fixed Rate Home Loans
Fixed-rate home loans are significant right now in the Australian property market – with over 880,000 households holding fixed-rate mortgages expiring in 2023, the switch to variable rates could mean they need to find hundreds if not thousands of dollars more on top of their regular monthly home loan repayments.
The era of cheaper, fixed rates during the pandemic is replaced with debt stress and potentially mortgage prison.
Let’s discuss fixed-rate home loans, how they are instrumental in stabilizing the housing market, and what owner-occupiers and investors can learn when managing fixed-rate mortgages.
What is a fixed-rate home loan?
A fixed-rate home loan refers to mortgage products with a fixed interest rate. Borrowers can choose between two types of interest rates – fixed and variable.
With a fixed-rate loan, you lock in an interest rate for a given period, usually between 1 to 5 years, although in some cases, the lender offers up to 10 years of a fixed-rate period.
Going on a fixed rate means you have the same amount of mortgage repayments throughout its duration, regardless of the housing market increasing interest rates or experiencing lower rates. This contrasts with variable rate home loans, which change in rates regularly, as they are influenced directly by the Reserve Bank of Australia cash rate, the lender’s loan terms, and the overall Australian economic trends.
Clients with fixed-rate home loans benefit from a prolonged period of lower interest rates than borrowers with variable-rate loans. This gives you time to prepare for higher rates, with the capacity to accumulate savings during the fixed period.
What happened to recent fixed-rate home loans?
Most mortgages taken out during the pandemic have expired in 2023 or will continue to do so over the coming years – this is consistent with Aussie home buyers’ tendency to apply for a fixed-rate home loan for an average of 3 years or less. So, from 2020-2023, these fixed rates have made home repayments more practical than if they were to settle for higher, variable-rate home loans.
During the COVID-19 pandemic, fixed-rate loans increased, with almost 40% of outstanding housing credit value from fixed-rate mortgages. This is about twice the usual size before the pandemic.
Even though Australians benefited during this time, the end of fixed-rate home loans now spells a significant challenge.
Year 2022 saw 590,000 fixed-rate loans that reverted to variable rates, this year has over 880,000, and another 450,000 borrowers will have higher variable rates in 2024.
Many of these mortgage holders risk falling behind on their scheduled repayments if they cannot adjust to the much higher loan costs – adding hundreds up to thousands of dollars every month. Experts estimate that if borrowers spend more than 30% of their income on mortgages, that’s already too much and could result to mortgage stress.
An analysis by Experian credit services suggests an upward trend in delinquency levels and are now back at levels seen before government programs to support pandemic needs were put in place.
Who should choose fixed-rate home loans?
For both owner-occupiers and investment property buyers, the biggest reason to fix your mortgage rate is to enjoy certainty. Fixed-rate loans lock in a consistent interest rate for a predetermined period, shielding you from market fluctuations.
Now, trying to get the timing right is always a difficult proposition, and you’d trust that lenders would always be one step ahead in the housing market. It’s best to work with a mortgage broker service so that you can review your options in the best way possible.
The main point of fixing your interest rate is to be comfortable locking in a deal you can plan for financially.
Advantages of fixed-rate home loans
Set repayments – A fixed-rate home loan’s primary advantage is its stability. Borrowers can plan their finances more effectively, knowing that their repayments will remain constant for the fixed-rate term.
Insulation from rate rises – During rising interest rates, fixed-rate borrowers are shielded from the impact of higher rates. This stability can protect against potential financial strain.
Budgeting ease – With consistent repayments, homeowners can create long-term budgeting plans with greater confidence, making it easier to manage other financial commitments.
What about the disadvantages?
Limited flexibility – Fixed-rate home loans often come with restrictions and limited flexibility compared to variable-rate loans. Prepayment penalties and higher break costs may apply if the borrower decides to refinance or pay off the loan before the fixed-rate term ends.
Insulation from rate decreases – While some fixed-rate loans allow you to switch to a lower variable rate if rates drop, not all lenders offer this option. Fixed-rate holders may miss out on potential savings if interest rates decrease significantly.
Rigid, locked-in rate – The fixed-rate period means borrowers are locked into the agreed interest rate, regardless of any market reductions. This can be a disadvantage if interest rates fall during the fixed-rate term.
Limited additional features – Fixed-rate loans may offer fewer additional features, such as offset accounts or redraw facilities, than variable-rate loans.
Why choose a fixed-rate home loan?
The numbers show that clients with fixed-rate loans avoided making higher loan repayments – equivalent to 3 months’ worth of the new required repayment once the fixed rate expires. But note that the longer you have a fixed rate, the more practical your repayments will be compared to a variable-rate loan.
Fixed-rate is also a more appealing loan type for newer borrowers because they have less time to build equity or have the necessary liquidity to manage variable rate rises.
Of course, fixed-rate borrowers should also consider preparing for higher rates – learn from the lessons of the pandemic and post-pandemic rates – and expect much higher repayments once the fixed rate ends.
How should I compare fixed-rate home loans?
Every lender offers fixed-rate mortgage products, but it pays to consider carefully other costs and fees before you commit to a loan.
Comparison rates that mortgage services publish include upfront and ongoing fees. It also shows the revert rate applied once the fixed period ends.
If the comparison rate is significantly higher than the advertised rate from the lender, the fees or the revert rate will likely be increased. Check the offers from different lenders to find the most favorable terms, prices, and features that suit your needs.
Considering the different fees helps you get a more accurate ‘cost’ of the fixed-rate mortgage product.
Let our mortgage professionals help you with every significant financial decision. We are here to research loan options and evaluate your financial goals to ensure the most informed choices are in your hands when you decide on fixed-rate home loans.
