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What is a 5-year fixed rate home loan?

A fixed rate home loan is simply a type of loan that locks in a home loan interest rate for a certain period of time. In the case of a 5-year fixed rate home loan, the initial interest rate would be held for five years before the loan reverts to a variable rate for the rest of the loan term unless you lock in another rate for a set period. 

Your repayments remain the same during the fixed period, but a fixed rate home loan also means you may need to pay break costs if you wish to pay off the mortgage within that time. 

A fixed interest rate can be applied to both owner occupiers and investment loans, but you're less likely to be able to access additional features like redraw facilities

Can you get a 5-year fixed rate?

A typical fixed rate period is between one and five years, although some lenders offer up to a 10 year fixed term. Lenders will offer different interest rates depending on the duration you are looking to rate lock for. 

The biggest risk with a fixed rate home loan is that rates may drop while you’re stuck at the agreed rate. For example - if during your home loan application you agree to a fixed rate of 5.5% for five years and the variable rate on a loan product drops to 2.5% during that time, you’ll be paying more interest under your fixed rate than you would as a variable customer. 

Interest rates are led by the Reserve Bank of Australia (RBA) and its monthly cash rate decision, but there are many other factors that go into a lender setting the rates for its products. Within five years a lot can happen and rates can move quite substantially, so before you lock in a 5-year fixed rate it’s worth reviewing your current financial situation, but also looking at the market and what interest rates are likely to do over the next few years. 

If you’re locking in a very low rate and it looks very unlikely that rates can go any lower, you may feel safer in your decision, but if the rate feels high you may prefer to look at a shorter fixed period.

What are the benefits of a 5-year fixed rate mortgage?

Your loan repayments won’t change over the five years, so you’ll be able to create a very accurate budget and be confident of no surprises. For first home buyers this can be a relatively safe and easy way to begin your mortgage journey and get used to regular repayments. 

You can lock in a low rate and not run the risk of it increasing. 

There is a lot of peace of mind in not worrying about interest rate rises or any large financial events that could cause rate rises. 

What are the risks of a 5-year fixed rate mortgage?

If rates drop during the time your loan is fixed, you will pay more interest than you would have done under a standard variable rate. 

You may have to pay additional fees if you want to pay off your mortgage during the fixed period or want to look at refinancing

Usually, fixed rate loans have less features than variable loans, which may restrict you if you want to make additional repayments or withdraw money from your mortgage. 

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What happens at the end of a 5-year fixed home loan?

If you don’t do anything when your 5-year fixed home loan ends it will revert to the variable interest rate your lender is offering at that time for the rest of the life of the loan. You have several options for what you can do next. 

If you’re happy to, you can go on with a variable rate home loan. This of course puts you at the mercy of interest rate increases but does make it easier to switch lenders, make extra repayments and can also give you access to additional features, like an offset account. 

If you think you could access a more competitive rate by locking in for another period, you can refix your loan. Most lenders will allow you to do this at the end of the initial period, although the rate is unlikely to be the same as your previous fixed rate. Some borrowers use this opportunity to refinance with a new lender as this may allow you to unlock a different comparison rate. 

You can also look at a split loan. Here, a portion of your mortgage will be fixed rate for a certain period while the remainder will be variable. This is a good option if you’re worried about rates increasing, but still want access to some of the additional features a variable rate mortgage provides.  

How to compare 5-year fixed rate home loans?

  • Compare advertised rates and comparison rates: The most important part of a fixed rate home loan is getting the most competitive rate from the beginning as you won’t be able to change it in the near future. The home loans with the lowest rate may not be the best for you, or even the cheapest once all things are considered. Using RateCity’s comparison tools you can see both the advertised rate of a loan and the comparison rate which includes all fees and charges. 
  • Check the fees, features and other benefits: Not all of a home loan’s ongoing fees and charges are included in its comparison rate. Consider checking for any extra costs that you may need to pay to avoid nasty surprises. You may also find special offers from lenders for new customers  Also, some mortgage lenders have special offers for new customers, such as interest rate discounts or even cashback. Consider the value of these deals before you apply, and don’t forget to check the eligibility criteria and the terms and conditions.
  • Check Real Time Ratings™: A quick way to estimate the cost and flexibility of a home loan before you enquire is to look at its Real Time Rating™ which is updated daily to more closely indicate a home loan’s overall value. You can also compare some of the top-rated home loans on the RateCity Leaderboards, or look for which mortgages have won a RateCity Gold Award.
  • Consider help from a mortgage broker: These home loan experts can look at your finances and recommend mortgage deals that may suit your personal goals and financial needs. Brokers can also negotiate on your behalf to help you get a better deal, provide access to exclusive home loan offers, and manage your mortgage application on your behalf, to help save you time and hassle.

Can a broker get you a more competitive 5 year fixed rate?

A broker may have access to rates beyond what a lender offers to the general public, so it may be worth engaging one if you’re hunting for the most competitive rate. They can also advise you on the best product for you and if there are any caveats or fees you need to be aware of. When you’re locking in a long-term interest rate, you want to start from the best place, so using an expert will help you ensure you don’t begin your five year fixed period with regrets.

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. 

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.

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.