Key takeaways

• An understanding of the benefits of fixing your home loan, including payment stability, protection from rate hikes, and certainty over long-term financial planning. 
• The potential drawbacks to consider when choosing to fix, such as missing out on rate drops, higher initial repayment rates, and restrictions on the level of additional repayments.

When contemplating home ownership or refinancing an existing mortgage, we typically face the decision of choosing between a fixed-rate or variable-rate home loan. While both options have their merits, deciding whether or not to fix your home loan requires careful consideration of various factors. 

This guide provides a comprehensive analysis of the pros and cons of fixing your home loan to help you make an informed decision.

Understanding fixed-rate home loans

A fixed-rate home loan is a mortgage with a set interest rate that remains constant for a predetermined period, typically between one to ten years. This means that regardless of market fluctuations, your monthly mortgage repayments will remain unchanged during the fixed period. After the fixed period ends, the loan usually reverts to a variable rate unless you choose to refinance or renegotiate.

Pros of fixing your home loan

Fixed home loans come with a range of benefits, with the common thread through each being predictability and a degree of financial certainty. 

• Payment stability - One of the most significant advantages of a fixed-rate home loan is the predictability it offers. With a fixed interest rate, you can budget more effectively as your mortgage payments remain consistent, making it easier to manage your finances.
• Protection from rate increases - If interest rates rise during your fixed term, your mortgage repayments will remain unaffected. This can provide peace of mind and protect you from potential financial strain due to increased borrowing costs.
• Long-term planning - Fixed-rate home loans are beneficial for individuals who prefer long-term financial planning and want to secure a consistent interest rate over several years.
• Rate environment predictability - When market interest rates are expected to rise, fixing your home loan can be a wise decision as it allows you to lock in a lower rate before the increase takes effect.

Cons of fixing your home loan

Whilst fixing your home loan can be beneficial, you should be aware that it can have its drawbacks under certain market conditions. 

• Limited flexibility - The main drawback of a fixed-rate home loan is its limited flexibility. If you decide to sell your property or refinance during the fixed period, you may be subject to break fees, which can be substantial.
• Missing out on rate drops - While you are protected from rate increases, you will also miss out on potential savings if market interest rates decline during your fixed term.
• Higher initial rates - Fixed-rate home loans often have slightly higher interest rates than variable-rate loans to account for the lender's risk associated with locking in a rate.
• Smaller extra repayments - Many fixed-rate home loans limit the level of extra repayments you can make during the fixed period, reducing your ability to pay off your mortgage faster.

Factors to consider before fixing your home loan

Consider the current economic conditions and interest rate forecasts. If interest rates are at historical lows and are expected to rise in the near future, fixing your home loan might be a prudent choice.

Assess your financial stability and capacity to handle potential rate fluctuations. If you value the certainty of fixed payments and can afford the slightly higher rates, a fixed-rate loan could be suitable.

Evaluate your long-term plans and how they may align with your mortgage. If you anticipate selling your property or refinancing in the near future, a variable-rate loan might offer more flexibility.

Conduct a thorough comparison of fixed and variable-rate home loan offers from various lenders. Analyse interest rates, fees, and loan features to find the most suitable option.

Making the decision

Seeking professional advice can ease the decision-making process. Consult with a mortgage broker or financial adviser to understand your individual circumstances better. They can provide personalised advice based on your financial goals and market conditions.

Another option to consider is to split your loan, fixing a portion and leaving the rest as a variable rate. This strategy combines the benefits of both options, offering some stability and the potential for savings.

It’s also important to review your loan on a regular basis, rather than setting and forgetting. If you opt for a fixed rate, it's essential to periodically review your loan to ensure it still aligns with your financial objectives. Circumstances may change, and refinancing could become a viable option.