Pros and cons of taking on a 30-year fixed mortgage

Variable and fixed rate mortgages each have advantages and drawbacks, with Australians having more commonly opted variable rates in the past couple of years.

More than nine in ten new mortgages written to Aussie borrowers since May 2022 had a variable rate of interest. Compare this to the United States of America (US), where the vast majority of mortgages have fixed rates of interest.

This discrepancy almost definitely has something to do with the length of the fixed rate periods available. In the US it’s normal for mortgages to be fixed for the entirety of the loan term – 20-, 30- or even 40-years.

In Australia, you’ll be hard pressed to find a fixed rate period that spans beyond five years.

So, what’s happening here? Should we reconsider our fixed and variable rate system? Let’s break down the case for both sides.

Yay: The pros of a 30-year fixed rate mortgages

There are a couple of reasons why there might be appetite among Australian consumers for longer term fixed rate home loans. They include:

Protection from rate changes

The option to fix their home loan rate for the entirety of their mortgage’s life could prevent borrowers from running into problems if interest rates go up.

Fixing means that, regardless of what happens with the RBA cash rate, your home loan repayments will stay the same.

Aussie borrowers can routinely lock-in their repayments for up to five years, but once this period is up their home loan will revert to a variable rate. If there's been a substantial increase in interest rates in the meantime, this could result in a huge increase in their minimum repayments.

For instance, borrowers who fixed their home loan rate for three years in 2020 or 2021, when the cash rate was at an all time low, likely had a nasty jolt when their fixed term expired in 2023 and 2024 and the cash rate was at a 12-year high.

Longer term financial planning

Another benefit to fixing a home loan’s interest rate for the long term is that doing so could allow borrowers to budget far into the future, safe in the knowledge they won’t have to contend with rate hikes.

This might be good for both individual borrowers and the wider economy, as it could allow people to be less frugal with their spending and, therefore, keep demand for products and services strong.

Nay: The cons of 30-year fixed rate mortgages

Conversely, there are also some potential drawbacks to introducing longer term fixed mortgages. These include:

Credit risk to banks

The main reason Australian lenders don’t offer longer fixed rate periods to home loan borrowers is that doing so would present an unacceptable credit risk. Banks don’t want to be locked in to charging an interest rate that ends up being lower than their cost of funding, as that could mean lenders earn less from a loan than it costs to provide.

Unlike the US, Australia does not have government-sponsored enterprises that take on the mortgages and associated risks if rates drop.

You might have heard of ‘Freddie Mae' and ‘Fannie Mac'. They aren’t characters from a Beatrix Potter book – they’re big government-funded entities that buy mortgages on the secondary market.

Having these entities to lean on allows lenders in the US to write 30-year fixed mortgages, safe in the knowledge they can sell those mortgage on after a few years.

It was suggested that Australia might introduce something similar during the 2008 global financial crisis – ‘Ausmac’ was the working title.

Proponents argued this would inject liquidity into the Australian mortgage market by making it easier for banks to ‘securitise’ mortgages to resell. As a result, more capital would be on hand, which would enable banks to write more loans to securitise and resell, and so on.

Opponents argued the existence of Freddie Mae and Fannie Mac allow US lenders to take too many risks and that the government shouldn’t be interfering with the home loan market in such a way.

Impacts the RBA’s ability to fight inflation

Another potential drawback is that, when the vast majority of borrowers are on fixed rate mortgages, rate hikes are a less effective tool against inflation.

When the RBA raises the cash rate (and thereby raises Aussies' mortgage repayments) its essentially attempting to reduce the disposable income available to borrowers. This, in turn, cools the economy.

While it’s no doubt a bummer when your home loan rate goes up, raising rates is currently the main way that Australia works to combat price increases.

Those on fixed rate mortgages don’t see their repayments increase when rates are hiked, so are not forced to curb their spending.

However, even if the majority of borrowers fixed their interest rate, rate hikes would still impact new borrowers, holders of personal loans, and the business lending space, among other things, so wouldn’t be completely useless.

After all, the US’ Federal Reserve also uses monetary policy as its principal tool against inflation.

Longest fixed rate periods available in Australia

Most lenders operating in Australia offer fixed rate terms starting at one year, up to a maximum fixed rate period of five years.

However, there are a couple of exceptions, two of which include:

• ANZ
  ANZ offers seven- and ten-year fixed rate periods on home loans offered to owner-occupiers and investors.

• RAMS
  RAMS also had ten-year fixed rate periods available, but the lender closed its doors to new business in August 2024. However, some customers of the Westpac-owned lender are likely still partway through a ten-year fixed mortgage that should still be honoured.

30-year fixed rate home loans: The verdict

There are some pretty compelling arguments regarding long-term fixed rate mortgages, no matter which side you look at.

While some borrowers would likely be in favour, plenty of smart people have expressed concern over the potential impact on the broader economy.

In early 2023, there was a parliamentary enquiry into this very subject.

The conclusion was that ‘Ausmac’ would need to be introduced before longer-term fixed rates could become a viable option in Australia.

The enquiry was inconclusive as to whether longer fixed rate periods would substantially improve liquidity in the mortgage market.

With that in mind, it’s unlikely that Aussie homeowners will be able to fix their home loan interest rate for 30 years any time soon.