Common Mistakes First Home Buyers Make With Fixed Rates

Choosing a fixed rate is a decision about certainty, and it comes with trade-offs you should weigh before you sign. For a first home buyer, the most common mistake is fixing the whole loan without checking what you give up in flexibility.

A fixed interest rate locks your repayment for a set period, often one to five years, though terms vary by lender. When the term ends, the loan usually moves to the lender's variable rate unless you choose a new fixed term. This article covers the mistakes we see most often and how to avoid them.

What Does a Fixed Rate Home Loan Mean for a First Home Buyer?

A fixed rate home loan holds your interest rate, and your repayment, steady for an agreed term. That makes budgeting easier, but you usually cannot benefit if rates fall, and extra repayments are often capped.

A variable interest rate can move up or down during the loan. Many variable loans let you use an offset account or redraw facility, while fixed loans often limit these features. Features differ between lenders, so check the product disclosure for the loan you are considering.

Mistake One: Fixing the Whole Loan

Fixing 100% of your loan is a common mistake, because you lose flexibility on the full balance. A split loan lets you fix one portion and keep the rest variable, so you get some certainty and some room to move.

Splitting has its own trade-off. The variable portion can rise if rates go up, and managing two loan parts can be more complex. A broker can compare how different lenders treat splits, including fees and features. If you are weighing this up, our page on split loans explains how a split structure works in practice.

Illustrative Example: Fixing Everything and Then Selling Early

Consider a buyer who fixes the full loan for five years and then relocates for work after three. In a scenario like this, the loan may attract break costs if the fixed rate has since fallen, and those costs can be significant.

The solution is to match the fixed term to how long you expect to stay. If the buyer had fixed half the loan for two years and left the rest variable, the fixed term would have ended before the move after three years, so no break costs would apply. If they had needed to leave during the fixed period, break costs would apply only to the fixed portion, not the whole loan. The outcome is less exposure to break costs, though the buyer gives up some repayment certainty on the variable half.

For a sense of repayments, a $600,000 loan over 30 years at an illustrative 6.75% p.a. works out to roughly $3,891 a month on principal and interest. This is an example only, and your rate will depend on your deposit size and lender. Use our mortgage repayment calculator to test your own numbers.

How Does Your Deposit Affect Fixed Rate Options?

Your deposit size affects which lenders and rates are available to you, and a smaller deposit can mean a higher rate or Lenders Mortgage Insurance (LMI). A 5% deposit is possible for eligible first home buyers, and LMI is a cost that is usually added to the loan.

The Australian Government 5% Deposit Scheme lets eligible first home buyers buy with a 5% deposit, with Housing Australia backing the lender so no LMI is payable. Applications go through a participating lender. Ask the participating lender which loan features, such as fixed rates or offset accounts, are available with the scheme. Price caps also apply and depend on the suburb and postcode.

Mistake Two: Ignoring Break Costs and Extra Repayment Limits

Break costs are a fee a lender may charge if you repay a fixed loan early, switch lenders or refinance during the fixed term. The amount depends on the loan size, the time left and how rates have moved since you fixed.

Extra repayments are often limited on fixed loans, which matters if you plan to save a bonus or tax refund toward your loan. Ask each lender for the cap in writing before you commit. Fixed loans may also limit offset accounts, so you might lose the interest saving that comes from holding savings against the balance.

Mistake Three: Not Planning for What Happens When the Fixed Term Ends

When a fixed term ends, your loan usually reverts to a variable rate, which may be higher than what you could negotiate. The practical step is to diarise the end date and review your loan a few months beforehand.

A loan health check can show whether your rate still suits you when the term is close to ending. Switching lenders after the term ends is usually possible without break costs, though other fees may apply.

Mistake Four: Skipping Pre-Approval Before You Choose a Loan Structure

Pre-approval shows how much a lender may let you borrow, and it helps you decide on a loan structure before you start bidding. It is not a final approval, and it can lapse or change if your circumstances change.

Knowing your borrowing capacity early helps you set a first home buyer budget that includes repayments at a higher rate than today's. Test your budget with a buffer, because a fixed rate protects you during the term only. Grants, stamp duty concessions and the First Home Super Saver scheme vary by state and personal circumstances, so check current rules with your state revenue office and the ATO, and speak to your accountant about any tax effects.

Choosing a Fixed Term That Fits Your Plans

The right fixed term depends on how long you plan to stay, how tight your budget is and whether you want to make extra repayments. A shorter fixed term or a split loan can suit buyers who want some certainty without locking in everything.

A fixed rate suits you if a stable repayment matters more than flexibility. A variable rate may suit you if you want offset or redraw features and expect to make extra repayments. Either way, ask your broker to explain the cost and risk of each option for your situation.

Call one of our team or book an appointment at a time that works for you, and we will walk through your fixed rate options for your first home.

Frequently Asked Questions