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A fixed rate home loan is a mortgage where the interest rate stays the same for a set period, typically between one and five years. Because the rate doesn't move, your repayments stay consistent for the entire fixed term, which makes budgeting easier and removes a lot of uncertainty from your finances.
This article from IMB Bank covers how fixed rate home loans work, what the trade-offs are, how they compare to variable rate loans, and what to think about before you decide.
What are the Key Takeaways?
• A fixed rate home loan locks in your interest rate for an agreed period, usually one to five years, so your repayments remain consistent during that time.
• Certainty is the main draw, but you won't benefit from rate cuts if the market moves in your favour.
• Extra repayments are often capped, and exiting the loan early can trigger break fees that can sometimes be substantial.
• Once your rate is locked in, RBA decisions don't affect it.
• Whether a fixed rate suits you comes down to your circumstances, including how long you plan to retain the loan, whether flexibility matters, and how you feel about interest rate risk.
What Is a Fixed Rate Home Loan?
As outlined above, a fixed rate home loan is a mortgage where the interest rate is set at the start and doesn't change for the duration of the fixed term. Your repayments are the same every month, whether rates go up or down in the broader market.
Fixed terms typically run from one to five years. After the fixed period ends, the loan usually reverts to a variable rate, so it's worth having a plan for what you'll do when that point arrives.
The main appeal is predictability. You know exactly what you're paying, which makes it easier to manage cash flow and plan around other financial commitments. If rates increase during your fixed term, your fixed interest rate won’t change. The trade-off is that if rates fall during your fixed term, your interest rate and repayments won't reflect that. You're locked in either way.
Explore IMB's fixed rate home loan options to see current rates and terms.
How Do Fixed Rate Home Loans Work?
When you take out a fixed rate home loan, your lender sets an interest rate based on market conditions at the time. That rate is then locked in for the term you choose. During that period, your repayments don't change, regardless of what happens in the market.
At the end of the fixed term, the loan rolls onto a variable rate, which may be higher than variable rates available for a new loan. From that point, your interest rate and repayments may move with rate changes. Some borrowers choose to refix at that stage, others will stay on a variable rate. Often, the end of a fixed rate period is the ideal time to negotiate a better rate with your lender.
One thing worth understanding: fixed rates for new loans are partly influenced by expectations about where rates are heading, not just where they are today. A fixed rate might already factor in anticipated interest rate movements, which means it's not always straightforward to judge whether fixing is the better deal.
What Is a Fixed Rate Period and How Long Does It Last?
The fixed rate period is the length of time your rate is locked in. Most lenders will offer terms of one to five years, though shorter and longer terms may be available.
A shorter fixed period gives you more flexibility. You'll be back to reviewing your options sooner, which matters if you think rates might fall or if your situation is likely to change. A longer fixed period gives you more certainty but commits you for a longer stretch, which means a higher potential of break costs being incurred if you need to exit early.
When considering if a shorter or longer fixed rate period suits your needs, you could think about where rates are heading, how long you plan to stay in the property, and how much you value stability over flexibility. It's also worth noting the end date of your fixed rate term so that you're not caught off guard when it ends.
What Are the Key Differences of Fixed vs Variable Home Loans?
A fixed interest rate keeps your interest rate and repayment amount the same for the duration of the fixed term, regardless of what the market does. A variable interest rate moves with the lender's rate, which is influenced by the RBA cash rate and other factors. Variable rates can go up or down, so your repayments aren't predictable in the same way.
Variable loans tend to offer more flexibility. Things like unlimited extra repayments, offset accounts, and redraw facilities are more commonly available on variable products. Fixed loans trade some of that flexibility for rate certainty.
A fixed rate is often preferred when you want repayment certainty, expect rates to rise, or need to know the number won't change from month to month. It may not suit borrowers who are planning to sell or refinance soon, want to make large extra repayments, or need access to an offset account.
If both matter to you, a split loan lets you fix part of your borrowing and keep the rest variable, which can be a practical middle ground. ASIC's MoneySmart has a useful overview of how to weigh up fixed and variable home loans if you want an independent starting point.
Can You Refinance a Fixed Rate Home Loan?
You can, but you’d need to evaluate your options. If rates have dropped and you're tempted to refinance, you’ll need to find out if there is a break cost payable. You may want to weigh the potential savings against the break fee you'll pay to exit your current loan.
Sometimes the numbers stack up against you, especially if you have a long time remaining on a high fixed rate in a falling rate environment. Often the break fee wipes out the saving, particularly if you're only a year or two into a longer term.
If you're closer to the end of your fixed period, it often makes more sense to wait until the fixed term ends rather than incur a break fee. Either way, it’s beneficial to do the full calculation. Add up the total cost of staying versus the total cost of leaving, including all fees, and see which works out better.
You can find more on refinancing home loans if you're weighing up your options.
Is a Fixed Rate Home Loan Right for You?
A fixed rate home loan makes the most sense when certainty genuinely matters to your situation. Not just because rates seem like they might go up, but because your budget benefits from knowing what you'll pay each month.
It's less suitable if you're likely to sell, refinance, or need to make large extra repayments in the near future. The restrictions and potential break costs can offset the benefits, and in those situations a variable or split loan might serve you better.
Consider your income, your plans, and your appetite for rate risk. If you're not sure, speak with a financial adviser or mortgage broker before you decide if it’s worth the investment.
Frequently Asked Questions About Fixed Rate Home Loans
Can I make extra repayments on a fixed rate loan?
Usually yes, but up to a limit. Most fixed rate loans allow a set amount in extra repayments each year without penalty. Go above that and you may be charged. Check the terms of your specific loan before making large additional payments.
How do break fees work?
When you exit a fixed rate loan early, the lender calculates how much interest income they're losing based on your remaining term, loan balance, and the gap between your rate and current market rates. The bigger that gap and the more time remaining on your fixed term, the higher the fee. Always ask for a written estimate before making any decision.
Can I refinance before the fixed term ends?
Yes, but factor in the break fee. Whether it's worth it depends on how much you'd save with the new rate versus what it costs to exit. Run the full numbers before deciding.
Are fixed rate loans affected by RBA cash rate changes?
Not during your fixed term. Once your rate is locked in, RBA decisions don't change your interest rate.
What happens when my fixed rate period ends?
The loan will usually roll onto a variable rate. Review your options a few months before the expiry date. You may want to refix, switch to a variable rate, or negotiate your rate. Don't let it roll over by default without checking whether a better option exists.
Can I have part fixed and part variable?
Yes. A split loan lets you fix one portion and keep the rest variable. It's a good option if you want some certainty without giving up all your flexibility. Ask your lender what split arrangements are available.
Can I sell my property during a fixed rate period?
Yes, but selling means repaying the loan in full, which could trigger a break fee. Get an estimate from your lender before you list, as it could affect your timing or the net proceeds from the sale.
