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Fixed Interest Rates: The Comprehensive Guide

Fixed Interest Rates are HUGELY popular right now.

And they’re only going to become more popular if interest rates continue to go up.

The question is:

How do you know if fixed rates are for you? Or if now is a good time to fix? 

Well, that’s exactly what you’re going to learn in this guide.

Fixed Rate Basics

In this section, we’ll cover the basics.

First, you’ll learn exactly what a fixed interest rate is.

I’ll also explain why fixed interest rates are so important for balancing market risk.

What are fixed interest rates?

Fixed interest rates (also known as fixed rate home loans) are interest rates that will not change for a period of time, usually between one to five years. While variable rates can move up, and down depending on a range of factors – fixed interest rates remain static, giving you certainty on the repayment of your loan.

australian fixed loans

Fun Fact: They’re called fixed rates because your repayment and interest rate remains set for a period… Kinda like a fixie bike has set gears… Except fixed rate home loans are much less popular than fixed gear bikes in the hipster community.

 

Why you might Need Fixed Interest Rates

As I mentioned, fixed interest rates are basically a way to reduce the risk of your loan repayments increasing. During the fixed rate period your repayment cannot change, so you know what your loan will cost for a set number of years.

So while your interest rate might be fixed for say five years, your repayments will stay at the same amount during this five year period regardless of the bank, market or RBA interest rate movements.

Bank_standard_variable_rates-2 (1)

If you are concerned about interest rate increases, a short term reduction in your income or would just prefer to know what your home will cost over the next few years fixed rates could be perfect for you.

For example, if you fixed your $300,000 home loan at 4.50% for 5 years, and after 2 years the RBA increased interest rates by 2.50%. Your fixed rate would remain at 4.50% until the end of the 5 year fixed rate term.

…but they come with some limitations

 

When Fixed Rates might not suit you

Well, the flip side is also true, so if interest rates decrease in the market the lower rate is not passed onto you, but that’s just the start.

Fixed home loans do come with a few limitations when compared to variable home loans.

fixed rate limitations

Fixed rates can be good, but they also come with a few limitations…

First and foremost, the majority of Australian lenders severely limit how much you can make in additional repayments per year.

For example, if you got paid a large bonus, received a tax refund or wanted to make additional repayments over the set ones – you will have to pay a penalty.

There are some banks that will let you make up to $10,000 in extra repayments, but if you receive anything over this you either have to:

  • ⛔️ Miss out on the benefits of paying less interest, or
  • ⛔️ Pay fixed break costs to end the set term early

Which leads us to the next point: Fixed Break Costs…

 

Why would I have to pay Fixed Break Costs?

People look at breaking their fixed rate early for a number of reasons.

Maybe interest rates have come down significantly and they want to pay less in repayments, they could have sold their property and need to pay back the loan or even want to reduce the loan amount.

Bank and lenders will charge you a ‘fixed break cost’ calculated as the amount they will lose if you end your fixed rate early.

breaking fixed rate

Cutting ties with your lender after you have fixed your rate can be expensive, you might need to pay Fixed Break Costs, sometimes called an Early Repayment Fee

Most of the banks are pretty similar in their approach, according to BOQ:

When you decide to fix your loan interest rate, we enter into a contract with you to fix the interest rate for your loan for a specified period. To enable us to fund your loan, we enter into a contract with a third party to lock in our funding costs at a fixed rate for the same period as your contract with us.

How this amount is exactly calculated will depend on the day you look to break the fixed rate, how much is still owing on the loan, what the remaining term and the interest rate differential.

Every bank uses a different formula, but BOQ uses the following:

Break Cost = Loan amount prepaid * (Interest Rate Differential) * Remaining Term.

 

A fixed rate break cost calculation

Some banks fixed break cost formulas look crazy complicated, let’s try to do a simple example to show how to calculate fixed break fees:

fixed rate break costs

  • A loan amount of $500,000 is fixed for 5 years and then is entirely repaid by the customer with 2.5 years of the loan’s original fixed term remaining.
  • The 5-year bank rate on the date the loan was fixed was 5.50% p.a. but the rates have fallen since then. The current 2.5-year bank rate when the contract was broken was 3.50% p.a.
  • The difference between the wholesale rates on the date the loan was fixed and when the contract was broken is: 5.50% less 3.50% = 2.00% Interest Rate Differential
  • The approximate Break Cost would therefore be: $500,000 x 2.00% x 2.5 = $25,000

…Yep $25,000 to pay out the fixed rate early 😣

There are sometimes ways around breaking fixed rates if you have sold a property, like substituting security or using a term deposit as security. We’d suggest speaking with our expert Mortgage Brokers about your situation and what can be done on 1300 088 065.

 

Can I make extra repayments without a fixed rate penalty?

The good news is depending on which bank you are with, it is possible.

major banks

Depending on the bank or lender, it is possible to pay extra on your fixed rate loan.

As an example, we have broken down the major banks, the name they used for their fixed rate home loan, and fixed break cost and the maximum amount you can make in extra repayments.

BankProductAmountName
CBACommonwealth Bank Fixed Rate Wealth Package Home LoanUp to $10,000 per yearEarly Repayment Adjustment (ERA)
NABNAB Choice Package Fixed Rate Home Loan$20,000 during your entire fixed rate periodPrepayment fee and economic cost
WestpacFixed Options Home Loan $30,000 throughout the fixed rate periodBreak costs
ANZANZ Fixed Interest Rate (with Breakfree Package)Lower of $5,000 per year, or 5% of the original loan amountEarly Repayment Fee (ERF)
St GeorgeFixed Rate Home Loan – Owner Occupied$10,000 per yearBreak costs
SuncorpSuncorp Fixed Rate Home Loan in Home Package Plus$499.99 in addition to your monthly repayment Early payment interest adjustment (EPIA)
BankwestFixed Rate Home Loan$10,000 per year Break Costs

 

These policies are always changing

As you can see above the fixed break cost can be a big money maker for the banks so you want to double check their current policy before putting extra into your fixed rate home loan.

We’d suggest giving your lender a call or speaking with our expert Mortgage Brokers to confirm the current policy on 1300 088 065.

 

How to find the Best Fixed Rate Mortgage

There are fixed interest rates that can give a little flexibility.

There are fixed interest rates that can give A LOT of flexibility.

(And even fixed interest rates loans with offset accounts)

In this section, I’ll show you how to find the best fixed rate mortgage.

how to find the best fixed rate mortgage

 

Does the Comparison Rate matter?

Comparison Rate is a fast way of seeing the true cost of your loan, it factors in the interest rate, fees and all charges over the life of the loan.

The lowest rate might not indicate the cheapest option, some banks and lenders charge MASSIVE ongoing and exit fees meaning while the interest rate might be low – they will sting you with the other fees.

Comparison Rate Example

The benefit of a comparison rate is that it gives you an even playing field for the loan, and lets you compare apples with apples across different lender’s products.

 

Why choose a 1 year fixed rate?

A large number of home buyers look to fix for one year because they don’t like committing for too long a period for all the reasons outlined above.

Namely that interest rates could drop over the medium term, you might want to make additional repayments or look at selling your home in the next few years.

The benefit is that you will be able to budget around your loan payments over the next 12 months, and might even have access to a lower introductory interest rate offered by the bank to get you settled in.

Fixed_Vs_Variable_Home_Loans (1)

While it usually comes down to personal reasons, we find 3 and 5 year fixed rates to be the most popular.

 

What banks have the best 1 year fixed rate?

The fixed rate market is constantly changing and depends on the money and bond market. If the bond market is predicting interest rates will go up in the future.

best 1 year fixed rate

In this section we look at the best 1 year fixed rates available, and if they are suitable for you.

 

Generally speaking, the shorter term 1 year fixed rates will be less than the 5 year fixed rates – and the same is true in the opposite situation if rates are predicted to fall the 3 or 5 year fixed rates are lower.

BankRate Comp Rate*Application FeeOngoing FeesMonthly Payment
Suncorp Bank (First home owner special)3.49%4.33%$0$395$1,569.70
Newcastle Permanent 3.69%4.75%$0$395 pa$1,609.01
ING 3.75%4.86%$0$299 pa$1,620.90
Adelaide Bank3.79%4.75%$375$180 pa$1,628.86
CBA4.04%5.38%$600$96 pa$1,679

Rates valid as at 19th February 2019 and subject to change without any further notification, monthly repayments based on a $350,000 loan over a 30 year period.

*The comp rate, or comparison rate is based on a loan of $150,000 over a 25 year fixed term. The comparison rate is true only for the examples given and may not include all fees and charges. Different, terms, fees and other loan amounts will result in a different comparison rate.

 

Why choose a 3 year fixed rate home loan?

Most people skip over the 2 year fixed rate and look straight for the 3 year fixed rate to help avoid any volatility in the money markets.  

In other words, they get more benefit from fixing for 3 years because 1 and 2 year rates are too short term.

australian swap money market rates

 

What banks have the best 3 year fixed rate?

Historically the interest rates on 3 year fixed loans have varied massively between the lenders.

best 3 year fixed rate

In this section, we look at 3 year fixed rates – and if they are suitable for you.

As the market has become more competitive (and as you can see below) the banks have brought their interest rate offers closer to one another.

Before you look at 3 year fixed rate options, you want to assess your medium-term goals and make sure the rate won’t affect any decisions or life events that might happen during that period.

BankRate Comp Rate*Application FeeOngoing FeesMonthly Payment
Suncorp Bank3.79%4.78%$0$395$1,628.86
BOQ3.82%3.93%$0$120 pa$1,634.84
ING 3.83%4.86%$0$299 pa$1,636
St George3.85%4.98%$0$395 pa$1,640.83
AMP3.85%4.69%$0$0$1,640.83
NAB*3.89%5.06%$0$399$1,648

Rates valid as at 19th February 2019 and subject to change without any further notification, monthly repayments based on a $350,000 loan over a 30 year period.

*The comp rate, or comparison rate is based on a loan of $150,000 over a 25 year fixed term. The comparison rate is true only for the examples given and may not include all fees and charges. Different, terms, fees and other loan amounts will result in a different comparison rate.

NAB also has a 2 year fixed home buyer special rate of 3.69%, comparison rate of 4.95% pa.

 

Why go for a 5 year fixed rate?

A 5 year fixed rate will give you the highest amount of certainty of your mortgage repayments.

Add to this the fact the banks can be negotiable on their longer-term fixed rates, you might be able to get a better deal look at this period.

As we have covered, longer-term fixed rates are not suitable for everyone – if you are looking at making additional repayments to your loan, think you could sell the property during this time or need extra flexibility on your loan like an offset account – it might not be a good idea.

Please give us a call on 1300 088 065, or get in touch online and one of our Mortgage Brokers will contact you to discuss your options.

 

What banks have the best 5 year fixed interest rates?

There is a fairly large gap between the different lenders at the 5 year mark.

best 5 year fixed rate

In this section we look at the best 5 year fixed rates available, and if they are suitable for you.

 

As mentioned, some of the larger banks like CBA and Westpac are sometimes willing to negotiate their fixed rates depending on your situation.

BankRate Comp Rate*Application FeeOngoing FeesMonthly Payment
Suncorp Bank (First home owner special)3.99%4.00%$0$395$1,668.94
ING 4.09%4.62%$0$299 pa$1,689.16
Westpac4.19%4.91%$0$395 pa$1,709.52
NAB4.24%4.93%$0$395 pa$1,719.74
St George4.39%5.06%$0$395 pa$1,750.60
CBA4.39%5.07%$0$395 pa$1,750.60

 

Rates valid as at 19th February 2019 and subject to change without any further notification, monthly repayments based on a $350,000 loan over a 30 year period.

*The comp rate, or comparison rate is based on a loan of $150,000 over a 25 year fixed term. The comparison rate is true only for the examples given and may not include all fees and charges. Different, terms, fees and other loan amounts will result in a different comparison rate.

 

What is the cheapest fixed rate home loan?

The cheapest rate does not mean paying the lowest amount of interest.

When looking at a fixed rate you want to factor in the application and ongoing fees, as well as what the fixed rate will change to when your fixed rate period ends.

brisbane-property-rennovation-loan

Cheap doesn’t always mean good with fixed rates, a low rate could be hiding lots of extra fees! Make sure you look at the comparison rate to understand what you are getting into.

Larger banks will be a bit cheeky and in a bid to make a little extra money when your fixed rate period expires you will automatically go back to their standard variable rate – without any discount!!!

(Yeah this sucks)

To avoid paying extra interest, talk to your Mortgage Broker before you fix your rate to understand what happens after the fixed rate period.

At Hunter Galloway, we will contact you 3 months before your fixed rate period ends to review your options, see if you want to re-fix your interest rate or alternatively we will negotiate a discount on your standard variable rate.

But today, the cheapest fixed rate prize goes to Suncorp Bank – they have a first home owner special at the moment, offering 3.49% fixed for 1 year to anyone who hasn’t bought a property before.

suncorp

Good work Suncorp, today they have the best offer on the market for first home buyers.

This fixed rate is so cheap because it is basically an introductory, or honeymoon rate.

While you are on a really good rate for the first 12 months, it will revert back to something higher after this period – so make sure your Mortgage Broker runs all the numbers for you and it makes financial sense.

BankRate Comp Rate*Application FeeOngoing FeesMonthly Payment
Suncorp Bank (First home owner special)3.49%4.33%$0$395$1,569.70

 

How do I know what features are important?

Banks have created a swath of bells, whistles and fixed rate features that might all sound super confusing to you.

So how do you know what features are important?

zhara guarantor home loan brisbane

How do you know what features are important for you on fixed rate home loans? Let’s find out…

Let’s break down the basics, what they do, and who they are good for.

  • ☑️ Rate Lock – Fixed Rates fluctuate each day, and banks will update their fixed rates as regular as this. The problem is you can look around for a great fixed home loan, sign the loan contracts at say 4% and then find out on the day of settlement the fixed rate has changed to 5%. With a rate lock, you pay the bank an extra fee to secure the interest rate at the time of loan application. So if the interest rate was 4% when you applied, you pay the rate lock fee to make sure it stays as 4% until you settle.
  • ☑️ Extra Repayment – Different lenders have different allowances when it comes to making extra repayments on a fixed loan. This can range from a few thousand dollars to up to 5% of the original loan amount. Make sure you ask the question up front if this is an important feature to you, in most cases if you make extra repayments on top of this you will have to pay fixed break costs.
  • ☑️ Redraw – Similar making extra repayments, some fixed rate lenders will allow you to take out the funds as redraw. A word of warning here, while some lenders will let you make extra repayments – some will consider withdrawing the funds as redraw ‘breaking’ the fixed rate contract, and charge you LARGE fees to access your own funds!
  • ☑️ Interest In Advanced – This is a terrific product for property investors and allows you to make bulk tax deductions by pre-paying your interest before 30th June. It can be beneficial from a cash flow and interest rate discount perspective, with some lenders giving you discounts of up to 0.20% off their regular fixed rates.
  • ☑️ Fixed Rate Offset – Most of the banks will only give you a partial offset to a fixed rate loan meaning all the money in your offset account will not reduce how much interest you are paying. There is a handful of lenders that will give you a 100% fixed rate offset account, meaning you have access to your funds – and the benefit of reducing your interest costs.
  • ☑️ Fixed Rate Construction Loans – As with the fixed rate offset, there is a small handful of lenders who will allow a fixed rate construction loan!
  • ☑️ Split Loan – A split loan allows you to have part of your loan as fixed, and part of your loan as a variable split. Giving you the best of both worlds, which takes us to our next section…

 

My Favourite Fixed Rate Strategy

In this section, I’ll reveal some of my favourite “quick & dirty” fixed rate strategies.

Let’s dive right in…

best of both worlds

 

Best of Both Worlds

The best of both worlds strategy is simple:

Assume you would like a loan of $300,000.

brisbane property options

First, you decide what fixed rate term you would like.

Let’s say, 3 years fixed with ING.

Then you think about how much of your loan you would like to pay back extra in the next 3 years.

For example, if you expect to get a $10,000 bonus per year for the next 3 years you’d be wanting to pay down an extra $30,000.

fixed rate extra repayment

With the best of both worlds strategy, you can look at fixing $270,000 of your loan.

And setting up a $30,000 split loan as a variable home loan rate.

This means you can have a 100% offset against the $30,000 variable loan.

…And have the stability of a $270,000 fixed rate portion.

fixed_rate_split_loan_example

 

A quick word of warning

I’ve said it once, and I’ll say it again – a fixed rate isn’t for everyone.

I fixed a few years ago worrying that interest rates were going to shoot up.

And they did, for a few months.

interest_rates_going_up_australia_chart (1)

…And then they went down, by a few per cent.

Meaning my repayments were HUGE and breaking the fixed rate cost thousands of dollars.

Worse yet, I ended up putting the property on the market and selling it – during the fixed rate period.

So if you aren’t 100% sure that you will be holding the property over the medium to longer term, then a fixed rate might not be for you.

 

Should I fix my rate?

Your fixed, or variable rate preference will come down to your individual situation and circumstance.

If you are looking at purchasing a property or refinancing our team at Hunter Galloway can help.

Mortgage Broker Brisbane

The Hunter Galloway Mortgage Broker Brisbane team is here to help. We have a team of home loan experts.

What we do is make it simple to get through the home loan process, and with our team of experts, we will help walk you through the process to complete your first home buyers grant application. If you are buying or refinancing your home we can help walk you through the process.

Our service does not cost you anything as we are paid by the lender when your home loan settles.

To chat about your deposit, lending and investment lending options book in a time to sit down with us, or feel free to call on 1300 088 065.

The information on this page is general in nature and should not be considered as advice. Before you act on this information you must seek independent legal and financial advice.