Everything You Need to Know About Fixed Rate Loan Terms

Choosing a fixed rate term for your first home loan means deciding how long you want rate certainty before your loan reverts to a variable rate.

How Long Should You Fix Your Rate?

Fixed rate terms typically range from one to five years, with some lenders offering terms outside this range. The term you choose depends on how long you expect to need payment certainty and whether you think rates will rise or fall during that period. Shorter terms give you flexibility to refinance or adjust your loan structure sooner, while longer terms lock in your rate through more of your loan's life but may come with stricter conditions.

Consider a buyer who secures a three-year fixed rate at 5.8% but plans to move cities for work within two years. When they sell, their lender calculates break costs based on the difference between their fixed rate and the current wholesale rate the lender can now earn on that money for the remaining 12 months. If wholesale rates have dropped to 4.9%, the buyer pays the lender for that lost margin across the remaining fixed period. In this case, the break cost could run into thousands of dollars, wiping out much of the benefit the fixed rate provided.

If you are weighing up certainty against flexibility, a pre-approval conversation before committing to a fixed term can clarify how different structures align with your timeline and deposit situation.

What Happens When Your Fixed Term Ends?

When your fixed term expires, your loan automatically reverts to your lender's current variable rate unless you take action. Variable rates at the time of reversion may be higher or lower than the rate you originally fixed at, depending on how the Reserve Bank and lenders have moved rates during your fixed period. Most lenders contact you a few months before expiry to discuss your options, which include fixing again, switching to variable, or refinancing to a different lender.

In our experience, buyers who ignore the expiry date often revert to a higher standard variable rate rather than a discounted rate negotiated at the time of application. That difference can add $150 to $300 per month to repayments depending on your loan size. Setting a calendar reminder three months before your fixed term ends gives you time to compare rates, negotiate with your current lender, or approach a broker to review other lenders without rushing the decision.

If your fixed term is approaching and you want to understand what comes next, our article on fixed rate expiry walks through the reversion process and your options in detail.

Can You Make Extra Repayments on a Fixed Rate Loan?

Most lenders allow extra repayments up to a certain limit during a fixed term, typically between $10,000 and $30,000 per year depending on the lender and loan product. Exceeding that limit usually triggers an early repayment penalty calculated in a similar way to break costs. Some lenders offer no extra repayment capacity at all on fixed loans, particularly on deeply discounted fixed rates where the lender has priced the loan expecting to earn interest on the full balance for the entire term.

If you expect a tax refund, bonus, or gift from family during your fixed period, check the extra repayment limit before choosing your loan product. A buyer who receives a $25,000 gift from parents after settlement may want to put that straight onto the loan, but if their fixed rate product caps extra repayments at $10,000 per year, the remaining $15,000 either sits in a separate savings account earning minimal interest or triggers a penalty if paid onto the loan. Splitting your loan between fixed and variable rates solves this problem by directing extra payments to the variable portion without penalty.

For buyers entering the market with support from family, our guarantor loans page covers how parental contributions can be structured at the time of purchase rather than after settlement.

Should You Split Your Loan Between Fixed and Variable?

Splitting your loan allows you to fix part of your balance for rate certainty while keeping the rest on a variable rate for flexibility. A common split is 50/50, though you can choose any ratio that suits your situation. The variable portion typically allows unlimited extra repayments and may include an offset account depending on the lender, while the fixed portion locks in your rate on that portion of the balance.

A buyer borrowing at current variable rates with access to an offset account can reduce the interest charged on their variable portion by parking savings, rental income, or other funds in the offset. Meanwhile, the fixed portion protects them if rates rise during the fixed term. If rates fall, the variable portion benefits immediately while the fixed portion continues at the agreed rate until the term ends. Splitting adds a layer of administration because you manage two loan accounts, but it removes the choice between certainty and flexibility by giving you both.

If you are working through how much deposit you need and what loan structure suits your circumstances, the 5% Deposit Scheme may reduce the amount you need to save while still allowing you to access split rate options through participating lenders.

How Do Break Costs Get Calculated?

Break costs apply when you pay out a fixed rate loan before the term ends, either by refinancing, selling the property, or making extra repayments beyond your allowed limit. The cost reflects the difference between the rate you fixed at and the rate the lender can now earn by lending that money elsewhere for the remaining period. If current rates are lower than your fixed rate, the lender loses income and passes that cost to you. If current rates are higher, no break cost applies.

The calculation uses wholesale rates rather than advertised consumer rates, so even if your fixed rate looks similar to current advertised rates, a break cost may still apply. Lenders are required to provide a break cost estimate before you proceed, but that estimate can change between the time you request it and the time you settle, particularly if the Reserve Bank moves rates during that window. Break costs are one reason buyers choose shorter fixed terms or split structures rather than fixing their entire loan for five years.

Understanding how your loan structure interacts with your broader financial position is part of assessing borrowing capacity, particularly when planning for life changes during the fixed term.

Fixed Rates and First Home Buyer Schemes

Fixed rates are available under the Australian Government 5% Deposit Scheme and can be combined with first home owner grants and stamp duty concessions depending on your state. Some lenders within the scheme's panel offer both fixed and variable options, while others may limit the products available to scheme participants. Fixing your rate does not affect your eligibility for government support, but it does affect what features your loan includes and how much flexibility you retain during the fixed period.

Buyers using the scheme with a 5% deposit often prioritise certainty in the first few years while they build equity, making a two or three-year fixed term a common choice. Once the fixed term ends, they may have built enough equity to refinance to a different lender or renegotiate their rate without needing the government guarantee. That transition point is worth planning for at the time you choose your fixed term, rather than discovering your options are limited when the term expires.

Call one of our team or book an appointment at a time that works for you. We work with first home buyers in Sydney every day and can walk through how different fixed terms and loan structures suit your deposit, timeline, and plans for the property.

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