Australian mortgage holders were confronted last week with the Reserve Bank of Australia’s (RBA’s) 11^th cash rate rise in 12 months. Variable mortgage holders will have already felt the impact of the increase on their household budgets. But fixed rate mortgage holders have had a little more protection, for now.

This has led to an increased interest in fixed rate mortgages generally. With many people wondering how long is the longest fixed rate mortgage in Australia. And how could this benefit them?

Understanding fixed rate mortgage terms in Australia

There are five main types of home loans in Australia, with fixed rate representing one of those. Historically, fixed rate mortgage represented about 20% of outstanding housing credit. However, during the COVID-19 pandemic, this increased to almost 40% of outstanding housing credit.

In 2022, fixed rates began to rose. And as they rose, the percentage of fixed rate mortgages being funded decreased. By the mid-year 2022, the percentage was down to about 5% of all new loans.

Of course, this makes logical sense. Borrowers will be more keen to fix a mortgage loan when they see the rates go down simply because it’s a better bargain. But there’s more to the story, because the length of the fixed rate term has an impact on the desirability of a fixed rate loan as well.

Fixed rate mortgage terms in Australia

In the US, 30-year fixed rate mortgage terms are very common. In fact, 30-year fixed rate residential home loans are the dominant mortgage product in the US with up to 90% of borrowers choosing this option. However, this is not the case in Australia.

In Australia, most fixed rate mortgages are much shorter three year set terms. After that three year period is up, the loan automatically reverts to the lender’s set variable rate.

The reason for this is simple. Generally speaking, the longer the loan term of a fixed rate mortgage, the higher the interest rate will be. This additional interest is a ‘trade off’, so to speak, for the repayment certainty the longer period brings the borrower.

Short to mid-term fixed rate home loans

Most lenders in Australia typically offer fixed rate mortgages for between one to five years. Because your home loan interest rate will change to your lender’s variable interest rate once your fixed term ends, it’s important to understand what this ‘reverting rate’ will be. Often it is higher than the lender’s other home loan rates.

Long-term fixed rate mortgage Australia

It’s very rare in Australia for lenders to offer a fixed rate for a period sufficient to be considered a long-term fixed rate mortgage. In 2022 there were only five Australian lenders offering fixed rate home loans for longer than five years. The range of fixed terms included six, seven and 10 years.

A March 2023 parliamentary paper indicated that currently only two major Australian lenders offer fixed rate home loan products for 10-year periods. But if you are interested in a long-term fixed rate mortgage, you could look to get one for that 10-year period.

Long-term fixed rate mortgages – why aren’t they offered in Australia

According to the 2023 parliamentary paper, long-term fixed rate mortgage periods tend to expose lenders to ‘more risk’. This risk comes from increases to the RBA’s cash rates which in turn increases lenders’ financing costs. Because of this longer-term fixed rate mortgage products tend to have higher interest rates.

In the US home loan market, where 30-year fixed rate residential home loans are a dominant product, this risk to lenders is shared with government-sponsored enterprises (GSEs). These GSEs purchase mortgage products from the lenders, creating a secondary mortgage market. The GSEs assume associated credit risks of the mortgages they purchase, which includes the impacts of fluctuating interest rates.

This does not happen in the Australian home loan market. And because there isn’t the additional risk sharing, lenders are reluctant to offer fixed term mortgage rates for long periods of time.

Is a long-term fixed rate the right choice for you?

Cash rate considerations

The first thing to consider is the cash rate. If you’re in a situation – like we are now – where we are experiencing rising loan rates, then it’s likely not a good time to lock in a fixed rate mortgage. However, if you feel that the rates are going to go higher, and stay there for longer than the term rate, then it’s worth considering.

Higher interest rates

Again, fixed rate loans tend to have a higher interest rate than the current variable rate. And the longer the term, the higher this rate may be. That’s simply to cover the risk that the lender carries in offering this product.

High break fees

The second thing to be aware of is break fees. In Australia, a fixed rate borrowers will pay very high ‘break fees’ if they want to either increase their repayments during the fixed term, or break the loan contract. These high break fees may cause Australian borrowers to shy away from fixed rate mortgages in the first place.

In the US market, borrowers do not have to pay break fees for fixed rate home loans. However, they do tend to pay a higher interest rate, to account for the higher loan risk.

No opportunity to refinance during fixed term

If you sign up for a ten-year fixed rate home loan, you will not be able to refinance during that 10-year period (without paying the associated break costs). If interest rates do fall during those 10 years, it will be more difficult to take advantage of potentially lower repayments.

Where to from here?

If you’re interested in finding out more about fixed rate mortgages, get in touch. Our team can help you find the right home loan product for you from over 40 of Australia’s specialist lenders – whether that’s a fixed rate mortgage, split loan or variable. Our expert team at Lending Loop is here to answer any questions you may have. Get in touch today.