What is a fixed rate?

When you fix, the lender agrees to charge that rate for the agreed term. Interest is applied to the outstanding balance and most fixed loans amortise with monthly repayments of principal and interest, so the scheduled repayment stays the same while the fixed term applies. At the end of the term the options are usually to revert to variable, re-fix or refinance, and lenders typically notify you in advance. Many borrowers split a loan into a fixed portion for certainty and a variable portion for flexibility.

Fixed rates apply to fixed-rate home loans, personal loans often used for consolidation, commercial loans and fixed-rate bonds, and to savings products such as term deposits. Features differ: a term deposit is straightforward, with interest paid at maturity, while a fixed loan may carry prepayment limits and exit rules.

Lenders price fixed rates from the RBA cash rate and market expectations for future moves, their wholesale funding costs for fixed maturities, their own margin for credit risk and competition, and market pricing such as swap rates and the yield curve. Because a fixed rate reflects the price of locking in funds for a period, it can move independently of variable rates.

That is the trade-off. A fixed rate gives stable repayments and protection against rate rises during the term, which suits tight budgets and borrowers who plan to keep the loan for the full term. A variable rate moves with monetary policy and lender pricing, offers more flexible features and is easier to refinance or pay down with lump sums, which suits borrowers who want flexibility or expect rates to fall.

A break fee compensates the lender if you leave a fixed-rate loan early: refinancing or paying it out before the term ends, selling the secured property, or switching to a product that cancels the fixed leg. Lenders commonly calculate an interest differential, the gap between your contract rate and current market rates, applied to the remaining principal for the rest of the term, often discounted to present value, plus an administration fee. Methods vary, so ask for a written estimate before acting.

Fixing also carries an opportunity cost if market rates fall, and an advertised fixed rate may include a higher margin to cover funding and risk. When comparing offers, look at the full cost over the fixed term including fees, confirm which features are restricted, ask how break fees are worked out, and check what happens automatically when the term ends.