As a mortgage broker one of the most common questions I receive from clients is whether they should fix the interest rate on their Home Loan. With interest rates rising and the cash rate increased just last week by a further 0.50%, borrowers on variable rate loans are seeing their loan repayments increased significantly from where they were only a few months ago.

With commentary from the Reserve Bank indicating that they will use interest rates as a tool to reign in inflation, lenders have lifted their advertised fixed rates, particularly in the popular 2 and 3 year fixed rate products, from around 2% late last year to close to 5% now. This is much greater than the increases to variable rates, although with further increases in the cash rate expected this situation may change.

Fixed rate loans are priced differently to variable rates and the recent significant increases are due to issues not linked to local inflationary pressures, although this is part of the problem. Banks and other lenders need to borrow money to be able to then lend it out to Home Loan customers, as they don’t hold sufficient deposits in bank accounts to cover the demand for lending. They access this from a number of different areas, with a large proportion borrowed from overseas banks. As the cost of money from these sources has increased, the extra costs are being reflected in the rates offered by lenders here.

Given the current interest rate uncertainty is now the best time to fix the rate on your Home Loan? There are advantages and disadvantages to locking in your interest rate which would determine if fixing your rate is the best option for you.


  1. Security

When you fix a rate on your Home Loan you are guaranteed that the rate will not change for the period you have fixed for. This means your repayments will also remain unchanged which is helpful for household budgets.

  • Potential Money Saver

If you are able to fix your rate at the right time you will save money on interest, potentially thousands of dollars. For example, if you were to fix a rate today you could lock in for 4.59% for two years with some lenders. These same lenders have variable rates at 3.34% after the most recent rate rise, so you are looking at a difference  of 1.25% to lock in a rate. If the variable rate was to keep rising, by locking in now you could save interest, however there is a risk that fixing now could cost you money too.

  • Some Flexibility

Most lenders will allow borrowers to make additional repayments when they have a fixed rate loan without incurring a penalty. It is most common for any extra repayments to be capped at a maximum $10,000 per year.

Some lenders also offer the ability to have an offset account linked to the fixed rate loan to help reduce interest costs further, although these are generally only partial offsets usually 40%. For example if you had a $1,000 balance in an offset account only $400 of that balance would be offsetting your loan.


  1. Penalties may be payable for early repayment

If you become dissatisfied with your lender, decide to sell your home or you simply want to take advantage of better deals elsewhere, when you are locked in to a fixed rate you could be charged a substantial interest penalty to break the contract. A complex formula is used to determine what the loss to the lender would be if the fixed rate contract is broken which is outlined in any Home Loan Contract. This penalty could offset any benefit you received by locking in originally.

  • Most flexible features are unavailable

Flexible features that are standard on most variable rate loans are either not available or offered with reduced benefits on a fixed rate loan. Offset is typically not available, or only offered as partial offset which reduces the effect it has on interest saving, and redraw is also not available on fixed rate loans.

  • Potential to lose on the interest rate bet          

Fixing a rate is effectively betting that the fixed rate will be lower than the variable rate for the time you choose to lock in for. In a volatile interest rate environment, where variable interest rates are dropping, if you have a fixed loan your rate will not reduce. The inflexibility of the fixed rate which is great in stable environments can be a curse at other times.

  • Potential for higher repayments once the fixed rate expires

A large number of borrowers have fixed their rates at historically low rates for the next few years. Once these rates expire the new interest rate will have increased significantly during this period, so their loan repayments could be much higher than what they have been used to paying. Borrowers may be in for a rude shock in the next year, depending on how long they locked in for when rates were much lower.

Split Loans

If you can’t decide which option is the best one for you it is possible to hedge your bets. Lenders also offer a split loan option which means you can have a portion of your loan at a fixed rate and the balance on a variable rate. By splitting your loan you retain the flexible repayment features of a variable rate loan, as well as having some of your loan locked away securely on a fixed rate for a few years.

It is always a great idea to speak with a mortgage broker who can guide you through the process, advise you on which loan structure would suit your needs best and recommend the most suitable lender to meet your requirements. At SHL Finance we are available to speak with you at any time. We are already proactively helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save clients thousands of dollars. We would love the opportunity to help you too. Please call Reece Droscher on 0478021757 to discuss your options

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