A fixed rate loan locks in your interest rate for a set period, typically one to five years. The term you choose determines how long you pay the same repayment amount before reverting to a variable rate.
First home buyers often fix their rate for certainty during the early years of ownership, when budgets are tightest and income is less predictable. The decision is less about picking the lowest rate and more about matching the fixed period to the time you need repayment stability most.
How Fixed Rate Terms Are Structured
Most lenders offer fixed periods of one, two, three, four or five years. A one-year fix gives short-term certainty with less commitment. A five-year fix locks in repayments longer but limits flexibility. When the fixed term ends, your loan automatically converts to the lender's standard variable rate unless you refinance or negotiate a new fixed term.
Consider a buyer who fixes at 5.89% for three years on a $500,000 loan. Monthly repayments sit at around $2,950. If variable rates drop to 5.5% during that period, the buyer continues paying $2,950 and cannot access the lower rate without breaking the fixed term and paying exit costs. If variable rates rise to 6.5%, the buyer remains protected at $2,950 for the full three years.
The loan does not disappear when the fixed term ends. It simply moves to a variable rate structure, and repayments adjust according to the prevailing rate at that time. Many buyers forget to check what the revert rate will be and find themselves on a higher margin than they expected.
Choosing Between One, Three and Five Year Terms
Shorter fixed terms suit buyers who expect income to increase or who want to retain the option to make extra repayments or sell within a few years. Longer terms suit buyers on tighter budgets who need certainty over a longer horizon or who expect rates to rise.
A three-year term is often chosen by buyers who are locking in their first home loan and want stability through the initial settlement period and first few years of ownership without committing to a full five-year restriction. A five-year term can make sense if rates are low and you want to lock that rate in before an expected upward cycle, but it comes with higher break costs if your circumstances change.
There is no universally correct term length. The decision depends on your income trajectory, how much deposit you held back as a buffer, whether you plan to make lump sum repayments, and how long you expect to stay in the property. Buyers using the Australian Government 5% Deposit Scheme may have less cash reserves after settlement and often lean toward longer fixed terms for repayment certainty during the first years.
What Happens When Your Fixed Term Ends
When the fixed period expires, your loan converts to the lender's standard variable rate. That rate is usually higher than the discounted variable rate offered to new customers. Repayments can increase significantly if you do not act.
In a scenario where a buyer locked in a three-year fixed rate in late 2023 at 5.6%, their term ends in late 2026. The lender's revert rate might be 7.2%, while the lender's current discounted variable rate for new borrowers is 6.4%. If the buyer does nothing, repayments jump to reflect the 7.2% rate. If the buyer contacts the lender or a broker before expiry, they can negotiate a new fixed rate or switch to the discounted variable product and avoid the revert rate margin.
Some lenders send reminder letters 60 to 90 days before the fixed term ends. Others do not. Setting your own calendar reminder six months out gives you time to compare options, request a rate review, or refinance if another lender offers a more competitive structure.
Fixed Versus Split Loan Structures
A split loan divides your borrowing between a fixed portion and a variable portion. This structure allows you to lock in certainty on part of the loan while retaining flexibility on the rest.
For instance, a buyer borrows $600,000 and splits it 50/50: $300,000 fixed at 5.8% for three years and $300,000 variable at 6.1% with an offset account attached. The fixed portion delivers stable repayments. The variable portion allows extra repayments into the offset, which reduces interest and keeps funds accessible if needed. If rates fall, the variable portion benefits immediately. If rates rise, half the loan remains protected.
Split structures are common among first home buyers who want some protection but also want access to features like offset accounts and the ability to make additional repayments without penalty. The variable portion can usually be refinanced or restructured without triggering break costs, even if the fixed portion remains locked.
Break Costs and Exit Penalties
If you pay out a fixed rate loan early, either by refinancing, selling the property, or making a large lump sum repayment beyond the permitted amount, the lender may charge a break cost. The cost reflects the loss the lender incurs because they arranged funding based on your fixed term commitment.
Break costs are not flat fees. They are calculated based on the difference between your fixed rate and the rate the lender can now earn by re-lending that money for the remaining fixed period. If your fixed rate is higher than current wholesale rates, the break cost can be significant. If your rate is lower, the break cost may be zero or negligible.
Most fixed loans allow annual extra repayments up to a certain limit, often $10,000 to $30,000 per year, without penalty. Check your loan contract or product disclosure statement before making additional payments. Buyers who fix the full loan amount and later receive an inheritance, bonus or tax refund may face unexpected costs if they try to pay down the loan during the fixed period.
Fixing Part of Your Loan While Keeping Flexibility
If you are uncertain whether to fix the full loan or leave it variable, fixing 50% to 70% of the balance can provide a middle path. You lock in certainty on the majority of your repayments while keeping enough on variable terms to make extra repayments, access an offset account, or refinance part of the loan without penalty.
This approach works well for buyers who have irregular income, expect bonuses, or anticipate receiving financial help from family after settlement. The variable portion absorbs those extra funds without triggering break costs, and the fixed portion ensures your core repayment does not move even if rates shift.
Buyers using low deposit options and paying lenders mortgage insurance often want the certainty of fixed repayments in the early years when cash flow is tightest. Splitting the loan allows that certainty while maintaining the flexibility to reduce the variable portion as income grows.
Reviewing Your Loan Before the Fixed Term Ends
Six months before your fixed rate expires, compare your current loan against what is available in the market. Look at your lender's current fixed and variable rates for new customers, check competitor offers, and assess whether your loan still suits your circumstances.
If your income has increased or your property has appreciated, you may now qualify for a lower rate or access to features you did not have when you first borrowed. If you have been making extra repayments into an offset or redraw on the variable portion of a split loan, your loan-to-value ratio may have improved enough to negotiate a better margin.
Contact your lender directly or speak with a broker to request a rate review or discuss refinancing before the fixed term ends. Waiting until after expiry means you revert to the standard variable rate and lose negotiating leverage. Acting early keeps your options open and ensures you move to a competitive rate structure without gaps in certainty.
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Frequently Asked Questions
What happens when my fixed rate term ends?
Your loan converts to the lender's standard variable rate, which is often higher than the rate offered to new customers. You can avoid this by contacting your lender or broker before the term ends to negotiate a new fixed rate or switch to a discounted variable product.
Can I make extra repayments on a fixed rate loan?
Most fixed rate loans allow extra repayments up to a set limit each year, typically between $10,000 and $30,000, without penalty. Repayments beyond that limit may trigger break costs.
Should I fix my entire loan or split it between fixed and variable?
Fixing 50% to 70% of your loan gives you repayment certainty on the majority of your borrowing while keeping flexibility to make extra repayments or access an offset account on the variable portion. This approach suits buyers with irregular income or those who want the option to pay down debt without penalty.
How are break costs calculated on a fixed rate loan?
Break costs reflect the lender's loss from ending your fixed term early. They are calculated based on the difference between your fixed rate and the rate the lender can now earn by re-lending the funds for the remaining fixed period. If current rates are lower than your fixed rate, break costs can be substantial.
What fixed rate term should a first home buyer choose?
The right term depends on how long you need repayment certainty, your income stability, and whether you expect to make lump sum repayments or sell within a few years. Three-year terms are common for first home buyers seeking stability without long-term restriction.
