Do You Know How Fixed Rate Loans Work for First Home Buyers?

A fixed rate loan holds your interest rate steady for a set term, typically between one and five years, which means your repayments stay the same regardless of what the Reserve Bank does.

For first home buyers in Carnegie, where the median unit price sits around $550,000 to $650,000 and competition for character apartments near Koornang Road is strong, knowing how fixed rates work can give you budget certainty during the first few years of ownership. Most lenders offer fixed terms from one to five years, and you choose the term when you apply. Once locked in, your rate and repayment amount won't change until the fixed period ends.

What Happens When You Fix Your Rate

You choose a fixed rate term at settlement, and your lender guarantees that rate for the duration. If the Reserve Bank increases the cash rate during your fixed term, your repayments stay the same. If rates fall, you continue paying the locked-in rate. Once the fixed term expires, your loan automatically converts to the lender's standard variable rate unless you refinance or negotiate a new fixed term.

Consider a buyer purchasing a two-bedroom unit in Carnegie with a 10% deposit. They fix their rate at the time of settlement for three years. Eighteen months later, the Reserve Bank lifts rates twice. Their repayments remain unchanged while variable rate borrowers in the same building see their monthly costs increase. When the three-year term ends, they can choose to fix again, switch to variable, or split their loan between both.

Fixed Rate Loans and Offset Accounts

Most fixed rate home loans do not include an offset account. Some lenders offer a partial offset that works at a reduced percentage, such as 40% or 60%, but full 100% offsets are rare on fixed products. This matters because an offset account can reduce the interest you pay without affecting your repayments, and it's a feature that many first home buyers value once they start building savings after settlement.

If you're entering the market with support from the First Home Guarantee and a 5% deposit, you may not have surplus cash to park in an offset initially. In that case, fixing your rate for two or three years provides budget certainty while you build your savings buffer. If you expect to have significant cash reserves post-settlement, such as from a bonus or inheritance, a variable loan with a full offset may deliver better value.

How Redraw Facilities Work on Fixed Loans

A redraw facility lets you access extra repayments you've made above the minimum required amount. Many fixed rate loans include redraw, but lenders often cap how much you can withdraw each year without penalty. Some lenders allow unlimited redraws, while others restrict you to one or two withdrawals annually or charge a fee for each transaction.

If you plan to make extra repayments and want the flexibility to access that money later, check the redraw terms before you lock in a fixed rate. Unlimited redraw on a fixed loan gives you some of the flexibility of a variable loan while still locking in your rate. Limited redraw might suit buyers who prefer the discipline of not touching extra repayments once made.

Fixed Rates and Low Deposit Options

The expanded First Home Guarantee allows eligible buyers to purchase with a 5% deposit without paying Lenders Mortgage Insurance. Fixed rates are available under this scheme, and the rate you're offered is generally the same whether you have a 5%, 10%, or 20% deposit. What changes is your loan amount and your monthly repayment, not the rate itself.

Carnegie's proximity to Caulfield and Glenhuntly stations makes it popular with first home buyers working in the CBD, and many are using the First Home Guarantee to enter the market sooner. Fixing your rate under this scheme locks in your repayments from day one, which can be helpful when you're adjusting to the costs of ownership on a tight budget. Just be aware that if you fix for five years and your income increases significantly, you may want the option to make larger extra repayments, which can be restricted on some fixed products.

Break Costs and Early Exit Fees

If you exit a fixed rate loan before the term ends, most lenders will charge a break cost. This fee compensates the lender for the difference between the rate you locked in and the current market rate. Break costs can range from a few hundred dollars to tens of thousands, depending on how much rates have moved and how much time remains on your fixed term.

Break costs apply if you refinance, sell the property, or pay off the loan in full during the fixed period. They also apply if you make extra repayments beyond the allowable limit, which is typically between $10,000 and $30,000 per year depending on the lender. Before fixing, ask your broker to explain the break cost formula your lender uses and run a scenario based on selling or refinancing halfway through the term.

Splitting Your Loan Between Fixed and Variable

Many first home buyers split their loan, fixing a portion for rate certainty and keeping the rest variable for flexibility. A common split is 50/50, but you can choose any ratio. The fixed portion gives you stable repayments, while the variable portion allows unlimited extra repayments and access to a full offset account.

Splitting works well if you want some protection against rate rises but also want the option to pay down your loan faster without penalty. For example, you might fix half your loan for three years and keep the other half variable with an offset. Any extra cash you accumulate goes into the offset, reducing interest on the variable portion, while the fixed portion anchors your minimum repayment at a known level.

How to Decide on a Fixed Rate Term

The term you choose should reflect how long you want rate certainty and how likely you are to sell, refinance, or pay down the loan within that period. Shorter terms, such as one or two years, offer lower rates but require you to make a new decision sooner. Longer terms, such as four or five years, lock in certainty but reduce flexibility and may carry higher rates.

If you're buying a one-bedroom apartment in Carnegie as a stepping stone and expect to upgrade within three years, a longer fixed term may not suit your plans due to potential break costs. If you're buying a two-bedroom unit you plan to hold long-term, a three or four-year fixed term can provide stability through the early years of ownership when your budget is tightest. Your mortgage broker can model different scenarios based on your income, deposit size, and plans.

Applying for a Fixed Rate Home Loan

The application process is the same whether you choose fixed, variable, or split. You'll need proof of income, savings history, identification, and details of the property you're purchasing. The lender assesses your borrowing capacity, serviceability, and deposit source, then offers you a rate based on the loan amount, deposit size, and term you select.

Once your application is approved and you have a formal offer, you can lock in your fixed rate. Some lenders allow you to lock the rate at approval, while others only lock it closer to settlement. Rate lock periods typically last 90 days, so if settlement is delayed beyond that window, the rate may need to be re-locked at the current market rate. If rates have risen in the meantime, your repayments will be higher than initially expected.

Call one of our team or book an appointment at a time that works for you to discuss which fixed rate structure suits your deposit, income, and plans for the property.

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