Fixed Rate Loan Terms and What You Need to Know

A fixed rate home loan locks your interest rate for a set period, typically between one and five years.

For buyers in Surry Hills, where many properties are apartments or terraces that owners eventually outgrow or renovate, the length of your fixed term matters more than the rate alone. Lock in too long and you might face break costs if you sell or refinance. Choose too short a period and you could miss out on rate protection when you need it most.

How Fixed Rate Terms Work

When you fix your rate, you're agreeing to pay the same interest rate for the entire term regardless of what happens in the market. One, two, three, and five year terms are the most common options. The rate you're offered usually varies depending on the term length. Lenders price shorter terms differently to longer ones based on their view of where rates are heading.

The term starts from settlement, not from when you apply. If you fix for three years and settle in March, your fixed period ends in March three years later. At that point, your loan automatically moves to the lender's variable rate unless you choose to refinance or fix again.

What Happens When Your Fixed Term Ends

Your loan doesn't disappear when the fixed period finishes. It converts to a variable rate, and that rate is often higher than what new customers are being offered. In our experience, borrowers who don't act before their fixed term expires can end up paying significantly more than they need to.

Most lenders notify you around 90 days before your fixed rate ends. That's your window to compare what's available, either with your current lender or elsewhere. Waiting until after the term expires means you've already moved to the variable rate, and you've lost any negotiating position you had.

Consider a buyer who purchased a two bedroom apartment in Surry Hills and fixed for three years. When that term ended, their rate jumped from 2.99% to 5.20%. On a loan amount of $700,000, that's an extra $1,300 per month. They refinanced within four weeks and secured a new fixed rate at 4.65%, saving around $320 per month compared to the revert rate.

Shorter Terms Give You More Flexibility

A one or two year fixed term makes sense if you're planning to sell, renovate, or expect your income to change. Break costs on shorter terms are lower because the lender's exposure to rate movements is smaller. If you're buying a one bedroom unit in Surry Hills with plans to upgrade in a couple of years, a shorter fixed term means you won't pay as much to exit early if you need to.

Shorter terms also let you reassess sooner. If rates drop during your fixed period, you're only locked in for a limited time. If they rise, you're still protected, just for a shorter window.

Longer Terms Suit Buyers Who Want Certainty

A five year fixed rate works when you want predictable repayments and you're confident you won't need to make changes to your loan. This suits buyers who've just purchased and don't plan to move, access equity, or make large additional repayments.

Longer fixed terms typically come with restrictions. Most lenders cap extra repayments at around $10,000 to $30,000 per year during the fixed period. If you're expecting a bonus, inheritance, or sale proceeds from another property, a long fixed term might not suit. You also can't easily switch to an interest only loan structure or redraw funds during a fixed period without breaking the loan.

Split Loans Let You Hedge Your Position

A split loan divides your borrowing between fixed and variable portions. You might fix 50% for three years and leave 50% variable. This gives you rate protection on part of the loan while keeping flexibility on the rest. The variable portion can usually be paid down without penalty, and you can access an offset account against it.

For Surry Hills buyers who want some certainty but also plan to make extra repayments or might need to access funds for renovations, a split structure often makes more sense than fixing the entire amount. You're not guessing whether rates will rise or fall. You're covering both scenarios.

Break Costs Apply If You Exit Early

If you sell, refinance, or pay off your fixed loan before the term ends, the lender will usually charge a break cost. This compensates them for the difference between the rate you're paying and the rate they can now lend that money at. Break costs can be zero if rates have risen since you fixed, or they can run into tens of thousands of dollars if rates have fallen.

You won't know the exact break cost until you ask for it, and it changes daily based on wholesale swap rates. Some lenders calculate break costs more favourably than others. If you think there's a chance you'll need to exit early, ask your broker how each lender structures their break cost formula before you commit.

Choosing the Right Term for Your Situation

The right fixed term depends on how long you plan to stay in the property, whether you'll make extra repayments, and how much rate movement you're willing to accept. If you're buying in Surry Hills and planning to rent the property out while living elsewhere, a longer fixed term on an investment loan can make budgeting easier. If you're an owner occupier who might renovate or sell within a few years, a shorter term or a split loan gives you more room to move.

Don't choose a term just because the rate looks lower. A slightly higher rate on a shorter term can cost you less overall if it saves you from break costs or lets you refinance sooner. Work backwards from your plans, not forwards from the rate table.

If you're not sure which term suits your situation, call one of our team or book an appointment at a time that works for you. We'll walk through your plans, your property, and what you're trying to achieve, then show you how different fixed terms would play out over time.

Frequently Asked Questions