Should You Choose a Longer Fixed Rate Term for More Stability?
When taking out a home loan, one of the biggest decisions you’ll face is whether to go with a fixed or variable interest rate — and just as importantly, how long to fix your rate if you choose that path.
Fixed rates offer the security of predictable repayments, while variable rates provide flexibility and the chance to benefit if market rates fall. But deciding how long to lock in your fixed rate — whether it’s two years, five years, or even ten years — can significantly impact your finances.
In this article, we break down the pros and cons of longer fixed-rate terms, explain how they work in the Australian market, and offer tips to help you decide whether this option aligns with your financial goals.
What Is a Fixed Rate Home Loan?
A fixed rate home loan locks in your interest rate for a set period, typically between one and five years, though some lenders offer terms as long as ten years. During this time:
- Your interest rate won’t change.
- Your monthly repayments stay the same, regardless of Reserve Bank of Australia (RBA) cash rate moves or lender adjustments.
Example:
A $500,000 loan fixed at 6.0% for five years would lock in monthly repayments of around $2,997 for the entire fixed period, even if market rates rise or fall. Once the fixed term ends, the loan usually reverts to the lender’s standard variable rate unless you refinance or negotiate a new deal.
Why Consider a Longer Fixed Rate Term?
Longer fixed-rate terms — typically five to ten years — offer long-term repayment stability, which can be especially appealing in uncertain economic conditions or during periods of rising rates.
Common reasons borrowers opt for longer fixed terms:
- Protection from rising rates
- Budgeting certainty
- Alignment with long-term homeownership or investment plans
Pros of Choosing a Longer Fixed Rate Term
1. Stability in a Volatile Market
Longer fixed terms shield you from market volatility and RBA rate hikes, offering peace of mind in a rising rate environment.
2. Simplified Budgeting
Predictable repayments help you plan your finances with confidence — particularly useful for families, retirees, or anyone with a fixed income.
3. Potential Long-Term Savings
If rates rise significantly during your fixed period, you can come out ahead compared to borrowers on variable rates.
Example:
A $400,000 loan fixed at 6.0% for five years would avoid potential increases to 6.5% or higher, saving around $100 a month compared to a variable loan.
4. Fewer Refinancing Headaches
Longer fixed terms reduce how often you need to renegotiate or refinance, saving time, effort, and potential costs.
Cons of Choosing a Longer Fixed Rate Term
1. Missing Out on Rate Cuts
If interest rates fall, you won’t benefit from lower repayments until your fixed term ends — potentially leaving you stuck with an uncompetitive rate.
2. Reduced Flexibility
Many fixed-rate loans:
- Limit extra repayments (often capped at $10,000–$30,000 per year).
- Exclude offset accounts.
- Restrict access to redraw facilities.
3. Break Fees
Exiting a fixed loan early — whether to sell, refinance, or pay it off — can trigger significant break costs.
Example:
Breaking a $500,000 fixed loan with three years remaining could cost thousands (or even tens of thousands) depending on market conditions.
4. Higher Upfront Rates
Longer fixed terms usually come with slightly higher interest rates than shorter fixed or variable options, reflecting the lender’s risk of locking in over a longer period.
Short vs. Long Fixed Rate Terms
| Short Fixed Term (1–3 years) | Long Fixed Term (5–10 years) |
| Lower rates and more flexibility | Greater stability and fewer refinancing events |
| Easier to refinance after term ends | Stronger protection against prolonged rate hikes |
| Requires more frequent renegotiation | Higher risk of missing out on falling rates |
Key Factors to Consider
1. Current Interest Rate Environment
If the RBA is signalling ongoing rate hikes, locking in a longer fixed rate can provide valuable protection.
If rates are expected to fall, a shorter fixed term or variable loan may be more cost-effective.
2. Your Financial Situation
Consider:
- Income stability
- Expenses and financial commitments
- Savings buffer
For those with tight budgets, the predictability of a long fixed term can be reassuring.
3. Loan Features
If you value features like offset accounts or extra repayments, check whether they’re available on your fixed-rate loan — or consider splitting your loan between fixed and variable portions.
4. Long-Term Plans
- Staying put for years? A longer fixed term may offer stability.
- Planning to sell, refinance, or upgrade soon? A shorter fixed term is probably safer to avoid break fees.
5. Rate Premium
Compare the rates for different fixed terms. Longer terms often carry higher rates, so ensure the stability you gain outweighs the added cost.
Real-World Examples
Case Study 1: Rising Rate Protection
Emma and Jack have a $500,000 mortgage and plan to stay in their home for at least 10 years. With rates climbing, they lock in a five-year fixed rate at 6.2%. As market rates rise to 7.0%, they save around $200 a month compared to variable-rate borrowers.
Case Study 2: Missed Savings Opportunity
Michael fixes his loan at 6.0% for five years. Two years later, the RBA cuts rates, and variable loans drop to 5.0%. Michael pays about $250 more each month compared to those on variable rates, illustrating the downside of locking in for too long during a falling-rate cycle.
Alternative Options to Consider
1. Split Loans
Divide your loan into fixed and variable portions.
Example:
- Fixed: $300,000 at 6.0%
- Variable: $200,000 at 5.5%
This allows you to enjoy stability on part of your loan while retaining flexibility on the rest.
2. Short Fixed Terms With Refinancing
Opt for a two- or three-year fixed period, then reassess market conditions to refinance when the term ends.
3. Variable Rates With Rate Caps
Some lenders offer variable loans with a cap on maximum rates, providing partial protection while maintaining flexibility.
Practical Tips Before Choosing
- Shop Around: Compare fixed rates across multiple lenders.
- Understand Break Fees: Ask your lender for an estimate of break costs before committing to a long fixed term.
- Align With Your Goals: Match the fixed term to your personal and financial plans.
- Consult a Broker: Mortgage brokers can provide tailored advice and help you access competitive fixed-rate options.
Final Thoughts: Is a Longer Fixed Rate Term Right for You?
Choosing a longer fixed-rate term can offer valuable stability, especially in a rising-rate environment. It can help you budget with confidence and shield you from unexpected repayment hikes.
But it’s not the right choice for everyone.
- If you prioritise flexibility, plan to sell or refinance soon, or want to benefit from potential rate cuts, a shorter fixed term or a split loan may be a better fit.
- If you’re looking for peace of mind and predictability, locking in for five years or more may be worth the slightly higher cost.
Ultimately, the right decision depends on your financial goals, risk tolerance, and long-term plans. By weighing the pros and cons and seeking professional advice where needed, you can make a confident, informed choice.
