Why Should First Home Buyers Consider Fixed Rate Loan Costs?

Understanding Fixed Rate Loans for First Home Buyers

When you're buying your first home, the array of home loan options available can feel overwhelming. One of the most significant decisions you'll face is choosing between a fixed interest rate and a variable interest rate. While the interest rate itself matters, understanding the fees and costs associated with fixed rate loans is just as important for your first home buyer budget.

A fixed interest rate means your repayments stay the same for a set period, typically between one to five years. This can provide certainty and help with budgeting, particularly if you're self-employed and your income fluctuates throughout the year. However, fixed rate loans come with their own set of costs that you need to factor into your decision.

The True Cost of Fixed Rate Home Loans

When you apply for a home loan with a fixed interest rate, several fees and costs may apply beyond the interest rate itself:

1. Application fees - These can range from $0 to $1,000 depending on the lender
2. Valuation fees - Usually between $200 to $400 to assess the property value
3. Settlement fees - Charged by lenders when your loan settles, typically $200 to $500
4. Ongoing monthly account fees - Some lenders charge between $10 to $15 per month
5. Break costs - Potentially substantial fees if you need to exit your fixed rate loan early

The break costs deserve special attention. If you sell your property, want to refinance, or need to make additional repayments above the allowed limit during the fixed period, lenders may charge break costs that can run into thousands of dollars. This is because they've locked in your rate based on wholesale funding costs, and changing your loan affects their position.

Fixed Rate Loans vs Variable Rate Loans: Trade-offs to Consider

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

• Limited or no offset account - Many fixed rate loans don't offer an offset account, which means you can't park extra savings to reduce interest
• Restricted additional repayments - Most fixed loans cap extra repayments at $10,000 to $30,000 per year
• Limited redraw facilities - Some fixed loans don't allow you to redraw extra repayments you've made
• No interest rate discounts - You're locked into the rate regardless of market movements

Variable interest rate loans, by contrast, typically offer full offset account access, unlimited additional repayments, and flexible redraw options. However, your repayments can increase if rates rise.

First Home Buyer Support Schemes and Fixed Rates

As a first home buyer, you have access to several government schemes that can help reduce your upfront costs:

First Home Loan Deposit Scheme - This allows eligible first home buyers to purchase a property with a 5% deposit without paying Lenders Mortgage Insurance (LMI). You can typically choose either fixed or variable rates under this scheme.

Regional First Home Buyer Guarantee - Similar to the above but specifically for properties in regional areas, offering low deposit options with a 5% deposit.

First Home Owner Grants (FHOG) - Depending on your state, you may receive a grant for purchasing or building a new home. In Western Australia, this is currently $10,000 for new homes.

First home buyer stamp duty concessions - These can save you thousands in upfront costs, and the savings can be applied to your first home buyer checklist expenses.

First Home Super Saver Scheme - This allows you to save for your deposit inside your super fund and withdraw it for your first home loan application.

These schemes work with both fixed and variable rate loans, so your choice of interest rate type won't affect your first home buyer eligibility for most programs.

Making the Right Choice for Your Situation

For self-employed professionals and those growing their wealth through property, the decision between fixed and variable rates depends on several factors:

Consider a fixed rate if:

• You want certainty in your repayments for budgeting purposes
• You believe interest rates will rise during the fixed period
• You're unlikely to sell or make large additional repayments soon
• Your income varies and you need predictable expenses

Consider a variable rate if:

• You want access to an offset account to reduce interest
• You plan to make substantial additional repayments
• You value flexibility over certainty
• You want the option to refinance without break costs

Many borrowers choose a split loan, combining both fixed and variable portions. This provides some certainty while maintaining flexibility with a portion of your loan.

Preparing Your First Home Loan Application

Regardless of which interest rate option you choose, having all your documentation ready will help your first home loan application progress smoothly. Your first home buyer checklist should include:

• Recent payslips or profit and loss statements (for self-employed borrowers)
• Tax returns for the past two years
• Bank statements showing your savings history
• Identification documents
• Details of any gift deposit from family
• Information about your current debts and expenses

Getting pre-approval before you start house hunting gives you confidence about your borrowing capacity and shows sellers you're a serious buyer.

Working with a Mortgage Broker

A mortgage broker can help you compare home loan options across multiple lenders, including those offering interest rate discounts or reduced fees. We understand the lending criteria for self-employed professionals and can present your application in the most favourable light.

When comparing fixed rate loans, we look beyond the headline interest rate to examine:

• Total fees over the fixed period
• Restrictions on extra repayments
• Break cost calculation methods
• Features available during and after the fixed period
• Whether 10% deposit or even 5% deposit options are available

This comprehensive approach ensures you understand the true cost of your loan, not just the advertised rate.

Your Next Steps

Buying your first home is a significant milestone in building your wealth. Understanding the fees and costs associated with fixed rate loans helps you make an informed decision that aligns with your financial goals.

Whether you're considering a fixed interest rate for certainty, a variable interest rate for flexibility, or a combination of both, having expert guidance tailored to your situation as a self-employed professional makes all the difference.

Makara Finance specialises in helping self-employed individuals and professionals secure home loans that work for their unique circumstances. We understand the challenges of demonstrating income when you're running your own practice or business, and we know which lenders offer the most suitable products for first home buyers in your position.

Call one of our team or book an appointment at a time that works for you to discuss your home loan options and create a strategy for buying your first home.