Lyla Lindsey
Fixed-rate mortgages are becoming increasingly popular in Australia, with the proportion of new mortgages that are fixed rising from 15% in June 2019 to 45% in September 2021. However, there is no centralised figure for the percentage of fixed-rate mortgages in Australia, as banks and lenders provide their own rates and terms. Typically, fixed-rate mortgages in Australia are offered for one to five years, with some lenders offering up to 10 years. While 30-year fixed-rate mortgages are unavailable in Australia, they are popular in the United States and could provide insulation for Australian borrowers from significant interest rate fluctuations.
| Characteristics | Values |
|---|---|
| Percentage of new mortgages that were fixed in June 2019 | 15% |
| Percentage of new mortgages that were fixed in September 2021 | 45% |
| Typical fixed-rate mortgage duration | 1-5 years |
| Maximum fixed-rate mortgage duration | 10 years |
| Typical additional repayments allowed | Up to $10,000 or $20,000 annually |
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What You'll Learn
Popularity of fixed-rate mortgages
Fixed-rate mortgages have become increasingly popular in Australia in recent years. The proportion of new mortgages that were fixed rose from about 15% in June 2019 to more than 45% by September 2021. This type of mortgage is particularly appealing to first-time buyers as it provides certainty to their household budget due to the unwavering price of the repayments.
Fixed-rate mortgages typically have a fixed period of one to five years, after which the rate reverts to a variable rate. Some lenders offer fixed-rate terms of up to 10 years, but these are less common due to the high risk for banks in offering longer-term fixed rates. During economic downturns, long-term fixed rates can expose banks to financial meltdowns.
Fixed-rate mortgages protect borrowers from sudden increases in interest rates. This benefit has been especially valuable in the current economic climate, as Australia's central bank has been raising interest rates to curb inflation. Borrowers with variable-rate loans have felt the pressure of these increases, while those with fixed-rate mortgages have been insulated from them.
However, the opposite is also true. If the central bank lowers interest rates, those with fixed-rate mortgages will still be required to pay their fixed rate of monthly repayments until the loan period concludes. Additionally, fixed-rate mortgages may have fewer features than variable-rate loans, such as the absence of offset accounts, redraw facilities, and repayment holidays.
While 20 or 30-year fixed-rate mortgages are popular in the United States, Australian lenders typically do not offer these longer-term options. This is partly due to the increased risk for banks and the potential for higher interest payments for borrowers. For example, an extra 1% on a $600,000 mortgage means $6,000 a year more in interest payments.
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Variable vs. fixed rates
The choice between a variable or fixed-rate mortgage depends on your personal preferences and financial situation. Here are some key considerations for both options:
Variable-Rate Mortgages
Variable-rate mortgages are tied to the market, meaning that the interest rate and repayment amounts can change at any time. This can be advantageous if market rates decrease, as your repayments will also decrease. Variable rates often provide more flexibility, allowing you to make extra repayments without penalties and giving you access to features like redraw facilities and offset accounts. This flexibility can be beneficial if you anticipate changes in your circumstances, such as a pay increase or higher expenses. However, the unpredictable nature of variable rates can make budgeting challenging, as your expenses may fluctuate.
Fixed-Rate Mortgages
Fixed-rate mortgages offer certainty and peace of mind by locking in an interest rate for a specified period, typically between one and ten years. During this fixed term, your repayment amounts remain consistent, making it easier to plan and stick to a budget. Fixed rates can protect you from potential interest rate hikes, but they also mean you may miss out on the benefits if market rates decrease during the fixed period. Additionally, fixed-rate loans generally have fewer features, and breaking the loan before the end of the fixed term can result in significant break costs.
Popularity of Fixed-Rate Mortgages in Australia
In Australia, fixed-rate mortgages have gained popularity in recent years. The proportion of new mortgages with fixed rates increased from about 15% in June 2019 to over 45% by September 2021. However, these loans are typically fixed for shorter periods, usually reverting to variable rates after one to five years. While Australian lenders could potentially offer 30-year fixed-rate mortgages, as seen in the US, such long-term fixed rates are currently uncommon in the country.
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Benefits of fixed-rate loans
In Australia, fixed-rate mortgages are typically locked in for up to five years, with some lenders offering up to seven years. After this period, the rate reverts to a variable rate. While fixed-rate loans may not be for everyone, they do offer several benefits.
One of the primary benefits of fixed-rate loans is repayment certainty. With a fixed-rate loan, the interest rate remains unchanged during the entire loan term, shielding borrowers from rising interest rates and allowing them to predict monthly costs and
For example, if interest rates increase during your fixed-rate period, you will continue to pay the lower, fixed rate, protecting your budget and savings strategy. On the other hand, if interest rates decrease, you won't benefit from reduced repayments during the fixed-rate period. This is a trade-off between certainty and flexibility, as variable-rate loans offer more flexibility in making additional repayments and potentially benefiting from reduced interest rates.
Fixed-rate loans are particularly attractive when interest rates are predicted to rise significantly. In such cases, borrowers can be assured that their monthly mortgage payments will stay the same, providing protection from sudden economic changes.
In Australia, the popularity of fixed-rate mortgages has been increasing. Between June 2019 and September 2021, the proportion of new mortgages with fixed rates jumped from about 15% to more than 45%. While Australian lenders typically offer shorter fixed-rate periods, there is no inherent reason why they couldn't offer longer fixed-rate mortgages, as seen in the US market.
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Drawbacks of fixed-rate loans
In Australia, the proportion of new mortgages that were fixed increased from about 15% in June 2019 to more than 45% by September 2021. However, these loans are typically fixed for only three years, sometimes as short as one year or as long as five years. After that, the rate reverts to the variable rate.
Higher interest rates
The primary disadvantage of fixed-rate loans is that you'll probably end up with a higher interest rate compared to a loan with a shorter term or an adjustable mortgage. That's the price you pay for long-term stability. You will spend more in interest over the life of the loan, and your monthly payments will be stretched over a longer period.
Higher monthly payments
A 15-year mortgage reduces the number of homes you can afford to buy and locks you into making monthly payments that are roughly 15% to 30% higher than you'd make with a comparable 30-year loan. There will also be less cash left over for renovating, investing, emergency funds, and other expenses.
Lack of flexibility
Fixed-rate loans often lack the flexibility of variable-rate loans. For example, you're usually not allowed to pay off your fixed-rate loan early without incurring a hefty fee. You also lose out on useful features that could lower the total interest cost of your loan, like redraw facilities.
Interest rates may drop
Even if interest rates drop significantly, you'll still be stuck paying the higher rate with a fixed-rate loan. This means you could end up paying more compared to a variable-rate loan.
Refinancing is complex
Although it is possible to lower your interest rate through refinancing, the process can be time-consuming and expensive. Refinancing involves leaving your current loan and applying for a new one, which typically involves exit fees, break fees, application fees, and additional expenses.
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Lender considerations
Lenders will consider your credit rating when deciding whether to give you a loan, how much to lend you, and at what interest rate. Equity is the difference between the value of your property and the outstanding balance of the loan used to fund it. For example, if an owner has purchased a house valued at $400,000 and has paid off $100,000 of the loan, the owner has $100,000 in equity. Equity can be negative if the property's value falls below the balance of the mortgage. Some property investors may use their positive equity in properties they already own to help them access additional investment home loans.
The First Home Owner Grant (FHOG) is a government grant given to first-time home buyers. The First Home Loan Deposit Scheme (FHLDS) is an Australian Government program aimed at helping eligible first-time buyers get on the property ladder.
The length of time it takes for a lender to approve or reject a home loan application depends on factors such as the particular lender and the borrower's financial situation. Obtaining home loan pre-approval or conditional approval beforehand may speed up the process. Pre-approval gives the borrower more confidence in working out how much they can afford to spend on a property.
Lenders' mortgage insurance is a type of insurance that may apply to your loan depending on the size of your deposit. This is a one-off cost added to the loan amount. Any additional amounts will increase repayments under the loan.
Home loan interest rates are the percentage of the loan amount that lenders charge borrowers for using their money to purchase a home. These rates can be either fixed or variable. Fixed interest rates remain the same for a set period, usually between one and five years, providing stability and predictability in repayments. Variable interest rates can change over time, influenced by the Reserve Bank of Australia's (RBA) cash rate and other economic factors. Variable rates can offer more flexibility but carry the risk of rate increases.
During the COVID-19 pandemic, the value of fixed-rate housing loans increased substantially, peaking at nearly 40% of outstanding housing credit in early 2022. Lenders lowered their advertised fixed rates to compete for borrowers. However, new fixed-rate lending slowed sharply from late 2021 as new fixed rates rose relative to variable rates. By mid-2022, new fixed-rate lending had declined to around 5% of total new lending.
Most borrowers in Australia who fix their mortgage interest rate do so for three years or less.
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Frequently asked questions
There is no centralized figure for fixed-rate mortgages in Australia. However, the proportion of new mortgages that were fixed increased from about 15% in June 2019 to over 45% by September 2021.
Fixed-rate mortgages in Australia are typically offered for shorter periods, usually between one to five years. Lenders may offer up to 10 years, but rarely more. This is because Australian banks are exposed to greater financial risk by offering longer-term fixed rates.
Fixed-rate mortgages protect borrowers from sudden hikes in interest rates, providing certainty to household budgets.
Fixed-rate mortgages in Australia tend to have fewer features than basic loans. They may also carry penalties for refinancing or exiting the loan before the fixed-rate period ends.
