Fixed Home Loans


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Life is unpredictable but your home loan doesn’t have to be

Life is unpredictable but your home loan doesn’t have to be. Fixed rate home loans can provide you with the certainty you need. Knowing that your repayments are fixed for a period of time can remove the worry of what your next repayment might be and you can concentrate on more important things in life.

Fixed home loans are most commonly taken for terms of 3 years, or 5 years. You can however, depending on the lender, take out a fixed home loan as short as 1 year or as long as 7 years, 10 years or even 15 years.

Home buyers who might find it difficult to meet their repayments in the event of interest rate increases are the most likely to fix their home loan rate for a period of 3 to 5 years. If your wage continues to increase with wage growth by the time you come out of your fixed rate loan you could likely be earning 12.49% more after 3 years and 21.67% more after 5 years. (This is assuming your wage grows at 4% per year.) With earnings growth you are far more likely to handle interest rate increases after a 5 year period.

Fixed or variable

Fixed home loans for property investors

Fixing for longer periods such as the 10 year fixed home loan, and the 15 year fixed home loans, are probably best for property investors who own a number of properties. By fixing for periods of 10 to 15 years, you can maintain significant certainty on your outgoings and you can manage your exposure to interest rate increases, by having each property on a different fixed rate loan term. If you have positively geared properties and you fix for a long period of time, such as 10 years you could be locking in the positive cash flow for years to come.

Myths on fixed rate home loans:

There is a myth that fixed rate home loans are only good for the banks and not the consumer because generally fixed rate home loans are advertised at a higher rate. So we assume that the lenders make more money out of fixed rate loans. This is simply not true. What is true, is that the banks do like fixed rate home loans as it extends the likelihood of you being a customer for longer. But banks by no means are good at predicting interest rates and certainly do not make more money by tying consumers up to higher fixed rates.

Advantages of fixed home loans

  1. Certainty of repayments
  2. Your fixed rate is set so if variable interest rates do rise above your fixed rate you will be better off.

Disadvantages of fixed home loans

  1. If interest rates fall below your fixed rate you cannot benefit from the fall in interest rates
  2. If you decide to break your fixed home loan for any reason you could be up for substantial break cost. It doesn’t matter to the banks whether you are selling because you decide to or because you are forced to due to circumstances out of your control such as moving to another job, family member getting sick etc.

How are fixed home loan break cost calculated

Break costs are generally calculated by working out how much the bank is losing when the bank needs to lend the money it lent you at a higher rate and now needs to loan it at a lower rate. So if they lent to you $100,000 at 5% for three years and 1 year in you repaid your loan in full. Now (a year later) they can only lend it out for 4% so they are effectively losing 1% for each of the next two years so you will pay 2% of the $100,000 = $2,000 break fees. This is oversimplified but does give you an indication of how it works.

A History of Interest Rates

Below i have included a chart showing the reserve banks inter-bank rate from 1976 to 2013. This is the interest rate that the banks essentially charge each other on a daily basis. The consumer rate is normally a couple of percentage points higher then this but this too does change depending on competition in the mortgage market. As you can see the more recent low interest rates is unusual.

Reserve Bank Rate chart

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