How does a 5-year fixed rate home loan work?
With a 5-year fixed rate home loan your rate and regular repayments will stay the same during the fixed period. After 5 years, the loan typically reverts to a variable rate, potentially changing your repayments. Alternatively, you can refinance to a different home loan.
A fixed rate home loan offers the certainty of repayments throughout the fixed term, irrespective of market fluctuations or sudden rate hikes. On the other hand, fixed rate loans tend to be less flexible than variable loans. For example, you may have limited ability to make extra repayments and access features like a redraw facility during the fixed period.
What happens at the end of a 5-year fixed home loan term?
When your fixed rate term expires, you’ll generally have two options:
- You’ll automatically roll onto a standard variable rate with your current lender
- You can refinance your home loan at a new fixed rate (or variable rate if you prefer) with your existing lender or another lender
How to compare 5-year fixed rates
1
Understand the advertised rate and comparison rate
The comparison rate estimates the overall cost of a home loan based on interest and fees. But the rate shown assumes you stay on that home loan for 25 years, so long after your fixed rate term has ended.
The advertised rate may be more useful as a guide for comparing fixed rate options if you plan to refinance after the fixed term expires. When refinancing, you apply for a new loan at a different interest rate.
2
Look at total interest paid during the fixed term
This can be a more tangible way of comparing fixed rate loans as it shows you exactly how much you will be paying in interest while your loan is fixed. A small difference in interest rate might not look like much but looking at the overall cost to you in interest will paint a fuller picture.
3
Check out the home loan fees
All home loans come with fees, some more than others. This may include an application fee, settlement fee and ongoing fees to maintain your home loan. Some lenders may also charge a ‘rate lock’ fee if you want to lock in your fixed rate before your loan application is approved and avoid a rate hike.
4
Find the best home loan features
If you like to save money (who doesn’t?), try to find a fixed rate home loan with additional features like an extra repayments option and redraw facility. Fixed rate home loans generally have fewer features than variable loans, but you may still be able to find a happy medium.
5-year fixed rate home loan pros & cons
Pros
- Certainty of repayments for the fixed five-year
- You’re protected from sudden rate increases for up to 5 years
- Compared to a longer fixed term, a five-year fixed rate means you can re-fix or refinance your home loan sooner if you need to without break costs
Cons
- You won’t benefit if there are rate cuts within 5 years
- Access to fewer features that can help pay off your home loan faster
- Break costs apply if you refinance or pay your loan off early
