Fixed Rate

Plain-English definition. A fixed-rate home loan locks the interest rate for a defined period — usually 1, 2, 3 or 5 years — guaranteeing the same repayment regardless of what happens to market rates.

How it works in Australia. Lenders set fixed rates by reference to wholesale swap rates plus a margin, not the RBA cash rate directly. So when bond markets price in cuts, fixed rates can fall before the RBA acts; when they price in hikes, fixed rates rise first. Australian fixed-rate loans almost always come with restrictions: limited or no extra repayments (commonly capped at $10,000–$30,000 per year), no offset account or only a partial offset, and substantial "break costs" if you exit early or refinance. ASIC's Moneysmart guide on fixed-rate break costs explains the calculation.

Concrete example. In 2021 a borrower fixed $700,000 at 1.99% for 4 years. By 2023, equivalent fixed rates had risen to 6.5%. The borrower wanted to sell with 18 months remaining on the fix. Break cost was approximately $30,000 — the present value of the lender's lost margin over the remaining term. Conversely, fixing in 2025 at 6.5% for 3 years and seeing rates fall to 5.0% would generate similar break costs against you.

Common confusion. Borrowers fix to "win" against the RBA. The reality is that fixed rates already price in expected cuts/hikes — you don't beat the market, you just buy certainty. Fixing also kills offset benefits and extra repayment flexibility.