Fixed Rate Home Loans: The Pros and Cons for First Timers

Getting Started with Your First Home Loan

Buying your first home is an exciting milestone, particularly for current and former Australian Defence Force members. When you're putting together your first home buyer checklist, one of the most important decisions you'll face is choosing between a fixed interest rate and a variable interest rate for your home loan.

As specialists in home loans for ADF members, we understand the unique circumstances Defence personnel face - from frequent postings to deployment schedules. Let's talk about fixed rate loans and whether they might be right for your situation.

What Is a Fixed Interest Rate?

A fixed interest rate means your home loan rate stays the same for a set period, typically between one and five years. During this time, your regular repayments won't change, regardless of what happens in the broader economy or with the Reserve Bank's cash rate decisions.

This contrasts with a variable interest rate, which can move up or down throughout your loan term. While variable rates might offer features like an offset account or unlimited redraw facilities, fixed rates provide certainty around your repayments.

The Advantages of Fixed Rate Loans for First Home Buyers

Budgeting Certainty

When you're buying your first home, having predictable repayments makes managing your first home buyer budget much more straightforward. You'll know exactly what's coming out of your account each fortnight or month, which helps with:

• Planning for other expenses
• Setting aside savings for emergencies
• Managing deployment allowances and service-related income changes
• Avoiding surprises if interest rates rise

Protection Against Rate Rises

If you lock in a fixed interest rate and rates increase across the market, you're protected. This can potentially save you thousands of dollars over the fixed period, particularly valuable when you're establishing yourself as a homeowner.

Peace of Mind

For Defence members dealing with operational commitments and potential postings, one less thing to worry about can be valuable. You won't need to monitor rate movements or wonder whether your repayments might suddenly increase.

The Disadvantages to Consider

Missing Out on Rate Decreases

The flip side of rate protection is that if interest rates fall, you'll still be paying the higher fixed rate until your fixed period ends. This has caught some borrowers out in the past when rates have dropped significantly.

Limited Flexibility

Fixed rate loans typically come with restrictions that variable loans don't have:

• Limited or no access to an offset account
• Restricted additional repayments (often capped at $10,000-$30,000 per year)
• Limited redraw facilities
• Break fees if you want to exit the loan early

Break Costs Can Be Substantial

If you need to sell your property during the fixed period - perhaps due to an unexpected posting - you might face break costs. These can run into thousands of dollars, depending on how much rates have moved since you fixed.

Understanding Break Fees and ADF Postings

This is particularly relevant for Defence members. While some lenders offer interest rate discounts and benefits for ADF personnel, break fees still apply. If you think there's a chance you'll be posted during your fixed rate period, it's worth:

• Choosing a shorter fixed term
• Considering a split loan (part fixed, part variable)
• Discussing your posting schedule when applying for a home loan

Home Loan Options for First Home Buyers in the ADF

As a first home buyer in the Defence Force, you have access to several advantages that can work alongside either fixed or variable rates:

Low Deposit Options

Many lenders offer low deposit loans for ADF members, allowing you to purchase with a 5% deposit or 10% deposit without paying Lenders Mortgage Insurance (LMI). This benefit applies regardless of whether you choose fixed or variable rates.

Government Schemes

The Home Guarantee Scheme includes the First Home Loan Deposit Scheme and Regional First Home Buyer Guarantee. These schemes can help you enter the market sooner with a lower deposit, and you can still choose a fixed interest rate if it suits your circumstances.

First Home Buyer Grants and Concessions

Depending on your state, you might be eligible for:

• First home owner grants (FHOG)
• First home buyer stamp duty concessions
• Other state-specific benefits

These benefits apply regardless of your interest rate choice and can significantly reduce your upfront costs.

Making Your Decision: Fixed, Variable, or Split?

When deciding on your first home loan application approach, consider:

1. Your risk tolerance - Do you prefer certainty or are you comfortable with rate changes?
2. Your financial situation - How much buffer do you have if rates rise?
3. Your posting schedule - How likely is a move in the next few years?
4. Current rate environment - Where do economists think rates are heading?
5. Loan features you need - Is an offset account important to you?

Many first home buyers choose a split loan, keeping part of their loan fixed and part variable. This gives you some certainty while maintaining access to features like offset accounts and the ability to make extra repayments.

Getting Pre-Approval

Before you start seriously buying your first home, getting loan pre-approval is valuable. This shows you:

• How much you can borrow
• What your likely repayments will be
• Which home loan options suit your circumstances
• Your first home buyer eligibility for various schemes

Pre-approval typically lasts 90 days and gives you confidence when making offers on properties.

Other Considerations for Your First Home Loan

Don't forget to factor in:

• Whether you can use the First Home Super Saver Scheme to boost your deposit
• If family members can provide a gift deposit
• Your borrowing capacity based on your Defence income
• The total cost of Lenders Mortgage Insurance if you're not eligible for an LMI waiver

These elements all affect your overall home loan application, regardless of whether you choose fixed or variable rates.

Choosing between a fixed interest rate and variable interest rate is a significant decision for first home buyers. There's no universally correct answer - it depends on your individual circumstances, risk tolerance, and plans for the future.

For ADF members, the unique nature of Defence service adds extra considerations to the mix. Whether you're at an early stage of your career or transitioning out of service, understanding your home loan options helps you make informed decisions about this significant financial commitment.

Call one of our team or book an appointment at a time that works for you to discuss which home loan structure might work for your situation.