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What is a 3-year fixed home loan rate?

A three-year fixed rate home loan allows you to lock in an interest rate for a three-year period before your initial rate expires and reverts back to a variable interest rate. During this time, your interest rate will stay the same, even if market interest rates rise or fall.

These types of home loans can appeal to people who want to be sure of their mortgage repayments for a period of time so they can get used to budgeting. Owner occupiers and first home buyers may appreciate how a fixed interest rate allows them to keep the repayments on their owner occupied home loan consistent. Australians with investment loans may also appreciate the consistency of a fixed interest rate, whether they're making principal & interest or interest only repayments. 

Three-year fixed home loans are typically one of the most common fixed terms for borrowers. However, you can find fixed home loan terms from as short as one-year fixed, to two-years, five-years and even ten-years fixed, so it’s important to compare all your options against your financial situation to find one that works for you.

What happens at the end of the 3-year fixed rate term?

Once the initial three-year period expires, you will usually be offered the opportunity to refix another interest rate or revert to a variable rate home loan.

Please note that if you accept a new three-year term, it’s likely to be at a different interest rate (either higher or lower). If you choose to revert to your lender's standard variable rate, your interest rate and mortgage payments on your loan amount are also subject to change.

Is now the right time to lock in a long-term fixed rate?

At the time of writing, many home loan interest rates had fallen to record lows, but have since started to slowly increase. Many banks and other mortgage lenders have been starting to raise the rates on their longer term fixed rate deals in anticipation of future changes to the cash rate from the Reserve Bank of Australia (RBA).

Depending on your financial situation, fixing your interest rate for three years or longer could theoretically allow you lock in a low rate, keeping your home loan repayments affordable even while variable rates increase. Plus, your repayments may be simpler to manage as you’ll know exactly how much you’ll need to budget for at least three years.

Of course, this would also effectively lock you in with your lender for at least three years, leaving you unable to refinance to another lender without being hit with significant break costs. Plus, at the end of the fixed rate term, your loan will revert to a variable rate, which could see you hit with bill shock if variable rates have risen significantly in the meantime. Be sure to compare your options and consider our financial situation before making a commitment.

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Benefits of a 3-year fixed rate home loan

There are a number of potential benefits to choosing a three-year fixed rate home loan, including the following:

  • Easier to budget: Because you know how much interest you’ll be paying over a set period of time, you can budget and set financial goals accordingly. This could be especially beneficial for new homebuyers who also have to pay for other initial expenses like renovations.
  • You won’t be affected by rate rises: Your interest rate is fixed for three years, meaning you can’t be affected by increases in standard interest rates.
  • Set regular repayments: You’ll know how much you have to pay each week, fortnight or month and can schedule payments accordingly.

Risks of a 3-year fixed rate home loan

On the other hand, there are also some possible drawbacks to choosing a three-year fixed rate home loan, such as:

  • Interest rate decreases won’t apply to your loan: You can’t benefit from a general decline in interest rates during your fixed interest period.
  • You may not be able to make extra repayments: Additional repayments aren’t always offered with fixed rate loans.
  • You may not be able to redraw: Not having a redraw facility means you can’t access any extra money you’ve deposited into your home loan.
  • You may be subject to break fees: If you choose to break your agreement for the fixed interest period it’s likely you’ll have pay a fee – and it could be significant.

Are there longer fixed rate home loans?

It’s also possible to fix your home loan’s interest rate for four or even five years. Some lenders may even allow you to extend a fixed loan term for longer. This could allow you to benefit from an affordable mortgage rate and simpler household budgeting for longer.

However, it’s worth keeping in mind that the longer you fix your rate, the longer you’ll be effectively locked into a mortgage with your lender, as you’ll likely have to pay significant break fees in order to refinance with another mortgage lender. Also, if variable rates were to rise significantly during your longer fixed term, your mortgage repayments could increase a lot once your loan reverts to a variable rate.

How to compare 3-year fixed rate home loans

Selecting and applying for a home loan offer isn’t just about deciding between a fixed rate or variable interest rate. Here are some of the other factors to take into consideration:

Interest rates

Aside from choosing between a fixed rate or variable rate, you should also look at a lender’s initial rate offering and how it shapes up against other lenders in the market.

Some lenders also offer split home loans, which means part of your home loan is variable and part of it is fixed. This could allow you to take advantage of some of the some of the benefits of both types of loans.

Fees

There are numerous fees associated with taking out a home loan and they can add up over time. Some of the most common fees to look out for include:

  • Application fees
  • Annual ongoing fees
  • Account-keeping fees
  • Legal & settlement fees
  • Settlement fees
  • Exit fees
  • Break fees (for fixed interest home loans)
  • Annual package fee (if your mortgage comes bundled with other financial products and services)

Also keep in mind that some lenders offer to waive fees if you meet certain conditions.

Sometimes a home loan with a low fixed interest rate but high fees and charges can actually cost more than a home loan with a higher interest rate but lower fees and charges. One quick and simple way to get a better idea of a home loan's total cost is to look at the comparison rate, which combines the cost of interest and standard fees into a single percentage. 

Repayment options

Different lenders have different stipulations for making home loan repayments. For example, if you have a three-year fixed rate home loan, or any fixed loan, you may not be able to pay any extra than the minimum repayments during the fixed rate period.

It’s important to choose a loan that offers you a reasonable balance of stability and flexibility in making repayments over time.

Other features

Some home loans are relatively basic, while others offer a suite of features. Consider other possible features such as:

  • An offset account: This is a transaction account that is linked to your home loan. The balance of your account is ‘offset’ against your loan balance, meaning your lender attributes those extra savings towards your loan – so you pay less in interest.
  • The option to redraw: A redraw facility allows you to borrow back extra money you’ve already repaid.
  • Incentives: Some lenders offer additional incentives for home loans such as the ability to earn frequent flyer points or being offered a free holiday.

Choosing an appropriate mortgage offer for your home or investment property comes down to conducting some independent research and comparing home loans in relation to your financial circumstances. This includes checking the eligibility criteria, such as your loan to value ratio (LVR). Also, before making a home loan application, consider seeking professional advice by speaking with a financial adviser or a mortgage broker.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

If a mortgage rate changes, will it affect your repayments?

If you have a variable rate home loan, changes to your mortgage rate may affect the cost of your repayments. Rising interest rate could cost you more in interest charges, while interest rate cuts could see you paying less interest on your home loan.

If you have a fixed rate home loan, your interest charges will stay the same during the fixed interest period, regardless of whether the lender’s variable rates rise or fall. Once the fixed rate term expires, your loan will revert to a variable rate, so be prepared in case of bill shock.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a mortgage rate?

The interest rate on a home loan is sometimes called the mortgage rate. This percentage indicates how much interest the lender will charge you with each home loan repayment. Your interest rate is effectively the “cost” of “buying” the money you’re using to buy a property – the higher your mortgage rate, the more your home loan repayments may cost.

Using a home loan calculator, you can estimate how much your home loan repayments may cost, based on your mortgage rate, loan term, and loan amount. This may also be affected by whether you’re making principal and interest repayments or interest-only repayments, if you have a fixed rate or variable rate mortgage, and any fees and other charges that may apply.

This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.