What are fixed rates home loans, and how do they work?

4 min read | 18 Mar 2022

But like most things in life, a lot can change in a short amount of time (let alone in 25 to 30 years), which could affect your ability to keep paying off your loan. That’s why a lot of Australian borrowers, particularly those who don’t like the possibility of their repayments increasing and not being able to do anything about it, choose to have the same interest rate locked in for a year or three. And if you’re a “better safe than sorry” kind of borrower too, that could be a good option for you, at least for a while.

Like the label on the can suggests, fixed rate home loans are specially designed to have an interest rate that will stay exactly the same for a pre-agreed amount of time, normally 1 to 3 years, sometimes longer. So whatever changes there are in interest rates in the general financial market during the fixed rate period, they won’t have any effect on the interest rate being charged in a fixed rate home loan. No ups, no downs, the interest rate doesn’t change, and therefore, neither do a borrower’s loan repayments.

A fixed interest rate is essentially an educated guess that represents what a lender expects will happen in the money market cycle over the entire fixed term of the loan. Basically, the rate is worked out like this: If variable interest rates have been low, lenders will offer fixed rates that are a bit higher, because the prediction is that market rates in the future are more likely to rise than fall, and the higher interest rate charged is supposed to cover the risk the lender is taking in case that doesn’t actually happen. On the other hand, if interest rates look like they’ve reached their peak and are headed south soon, a lender might offer a fixed rate that’s slightly lower than the current variable market rate. This would be appealing to borrowers who want to lower their repayments now rather than wait for rates to drop later, and who also want more predictability for their budgeting. Once the pre-agreed period on a fixed rate home loans ends, the borrower can either transfer to a variable rate home loan and have their repayments calculated according to the lender’s current market rate, or choose another fixed rate home loan on a new fixed (and likely different) interest rate for a new agreed period of time.

Both variable and fixed rate home loans have their pluses and minuses and the right option for you will depend on what’s more important to you at the time. Fixing today means you’ll be protected from increases in variable rate changes, so your household budget won’t feel any unexpected financial stress. But those increases may never happen or be as high as predicted. And if the variable rate actually drops, you won’t get any benefit because your fixed rate will keep your repayments the same instead of lowering them. You also can’t access your redraw during the fixed rate period – it’s part of the price to have protection against possible future increases. While there isn’t always a clear-cut answer to what you should do, bear in mind that you can switch between fixed rate and variable rate loans over the life of your mortgage to get the best combination for you. Better still, Athena fixed rate home loans have a few additional features other lenders don’t offer such as:

• The flexibility to make additional repayments of up to 5% of loan balance

• Lower interest rates for lower LVRs

• No application fees, ongoing fees or exit fees

Take a look at our current fixed rate home loans to see if they might be a good fit for you either now or at some stage down the track.

Fixed rate home loans are designed so that refinancing or even extending the fixed period can only happen after the original fixed period has ended. It’s not that changes can’t be made, but they usually come with “break costs” because they mess with the original maths used to calculate the rates and returns. How you restructure your loan after a fixed rate period ends is very important, and you want the time to have a good think about your next steps. That’s why at Athena, when you’re getting close to the end of your fixed rate term, we’ll let you know prior that we’re going to automatically roll you onto our low variable AcceleRATES loan based on your LVR (loan-to-value ratio) tier on the day your fixed term expires. You’ll have plenty of flexibility, and you can even refix your loan on a new fixed rate for another 1, 2 or 3 years if you want. You can see all the ins and outs of our refinance options here.

While they’re quite common in America, they’re not available in Australia. Here, fixed-interest loans have fixed terms of 1 year up to a maximum of 5 years. After the fixed term ends, they revert to a variable rate that reflects the current market rate.

Sure. If you’re already a home loan customer with us or someone else, you can switch to a fixed-rate loan pretty much immediately, or we’ll give you a quote to use later. Just bear in mind that if you wait, the rate you fix to may be different to the one you’ve been quoted because it will be based on the rate published on the day your loan commences.

It’s like having two different types of loans that together total the amount you’ve borrowed. The first part of your loan would use a variable interest rate to work out your repayments, while the other part would use the same unchanging rate for a set period. We don’t currently offer split loans – it’s either 100% fixed or 100% variable at the moment. But it’s on our radar for the future.